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The Joint Strike Fighter Program is structured to use a common production line to produce three versions of a single aircraft. These aircraft will be tailored to meet conventional flight requirements for the U.S. Air Force, short take-off and vertical landing characteristics for the U.S. Marine Corps, and carrier operation suitability needs for the U.S. Navy. The program will also provide aircraft to the British Royal Navy and Air Force. Table 1 shows the services' planned use for the Joint Strike Fighter. A key objective of the Joint Strike Fighter acquisition strategy is affordability--reducing the development, production, and ownership costs of the program relative to prior fighter aircraft programs. To achieve its affordability objective, the Joint Strike Fighter program has incorporated various acquisition initiatives into the program's acquisition strategy and various technological advances into the fighter. Among the acquisition initiatives planned was to develop critical technologies to a level where they represent low technical risk before the engineering and manufacturing contract is awarded. The expectation was that incorporating these initiatives into the acquisition strategy would avoid cost growth, schedule slippage, and performance shortfalls that have been experienced in other weapon acquisition programs. To date, the Joint Strike Fighter Program has awarded contracts totaling over $2 billion to Boeing and Lockheed Martin for the current concept demonstration phase. During this phase, DOD required each contractor to design and build two aircraft to demonstrate the following: commonality/modularity to validate the contractors' ability to produce three aircraft versions on the same production line; the aircraft's ability to do a short take-off and vertical landing, hover, and transition to forward flight; and satisfactory low airspeed, carrier approach flying and handling qualities. Each contractor was required to submit a Preferred Weapon System Concept, which outlines its final design concept for developing a Joint Strike Fighter aircraft that is affordable and meets performance requirements. The Preferred Weapon System Concept includes results from the flight and ground demonstrations and is being used by DOD to select the winning aircraft design and to award the engineering and manufacturing development contract. During engineering and manufacturing development, the Joint Strike Fighter will be fully developed, engineered, designed, fabricated, tested, and evaluated to demonstrate that the production aircraft will meet stated requirements. Critical junctures in engineering and manufacturing development are the preliminary and critical design reviews and commitments; testing of aircraft; and commitments to production hardware, including the purchase of long lead production items. It is at the critical design review that decisions are made toward finalizing the aircraft design and begin building test aircraft. About two-thirds of engineering and manufacturing development funding will be spent after this review. Figure 1 shows planned Joint Strike Fighter aircraft designs by contractor. In our previous work on best business practices, commercial firms have told us that a key part of product development is getting the technology into the right size, weight, and configuration needed for the intended product--in this case, the final Joint Strike Fighter design. Once this has been demonstrated, the technology is at an acceptable level for product development. Technology readiness levels (TRL) can be used to assess the maturity of technology and can reveal whether a gap exists between a technology's maturity and the maturity demanded for successful inclusion in the intended product. Defining this gap for the Joint Strike Fighter technologies is important for determining whether they can be expected to demonstrate required capabilities before being integrated into the aircraft design. Readiness levels are measured along a scale of one to nine, starting with paper studies of the basic concept, proceeding with laboratory demonstrations, and ending with a technology that has proven itself on the intended product. (See app. I for a detailed description of TRLs.) The Air Force Research Laboratory considers TRL 7 an acceptable risk for starting the engineering and manufacturing development phase. The readiness level definitions state that for a technology to be rated at TRL 7, it must be demonstrated using prototype hardware (such as a complete radar subsystem) that is the same size, weight, and configuration as that called for in the final aircraft design and that prototype has to be demonstrated to work in an environment similar to the planned operational system. We have previously reviewed the impact of incorporating technologies into new product and weapon system designs. The results showed that programs met product objectives when the technologies were matured to higher levels and conversely showed that cost and schedule problems arose when programs started when technologies were at low readiness levels. For example, the Joint Direct Attack Munition (JDAM) used modified variants of proven components for guidance and global positioning. It also used mature, existing components from other proven manufacturing processes for its own system for controlling tail fin movements. The munition was touted for its performance in Kosovo and was purchased for less than half of its expected unit cost. However, the Comanche helicopter program began with critical technologies such as the engine, rotor, and integrated avionics at TRL levels of 5 or below. That program has seen 101 percent cost growth and 120-percent schedule slippage as a result of these low maturity levels and other factors. In commenting on our report concerning better management of technology development, DOD agreed that TRLs are important and necessary in assisting decision makers in deciding on when and where to insert new technologies into weapons system programs and that it is desirable to mature technologies to TRL 7 prior to entering the engineering and manufacturing development phase of a weapon system program.Since that time, DOD has adopted the technology readiness levels as a means of assessing the technological maturity of new major programs. In a July 5, 2001, memorandum, the Deputy Under Secretary of Defense (Science and Technology) stated that new DOD regulations require that the military services' science and technology executives conduct a technology readiness level assessment for critical technologies identified in major weapon systems programs prior to the start of engineering and manufacturing development and production. The memorandum notes that technology readiness levels are the preferred approach for all new major programs unless the Deputy Under Secretary approves an equivalent assessment method. The Joint Strike Fighter Program, like many other DOD programs, has used risk management plans and engineering judgment as a way of assessing technological maturity. The Principal Deputy Under Secretary of Defense (Acquisition and Technology) has determined that these means will continue to be used by DOD and the Joint Strike Fighter contractors to assess the program's technological risk. Risk management plans and judgment are necessary to managing any major development effort like the Joint Strike Fighter. However, without an underpinning such as technology readiness levels that allow transparency into program decisions, these methods allow significant technical unknowns to be judged acceptable risks because a plan exists for resolving the unknowns in the future. Experience on previous programs has shown that such methods have rarely assessed technical unknowns as a high or unacceptable risk; consequently, they failed to guide programs to meet promised outcomes. Technology readiness levels are based on actual demonstrations of how well technologies actually perform. Their strength lies in the fact that they characterize knowledge that exists rather than plans to gain knowledge in the future; they are, thus, less susceptible to optimism. In May 2000 we reported that all of the eight technologies identified by the Joint Strike Fighter program office as critical to the program were expected to be at maturity levels below that considered acceptable for low risk when entering engineering and manufacturing development (TRL 7). The eight critical technologies are: prognostics and health management, integrated flight propulsion control, subsystems, integrated support system, integrated core processor, radar, manufacturing, and mission systems integration. (See app. II for a description of these technologies.) During our review last year, we worked with the two competing contractors and the program office to arrive at the applicable TRLs for the critical technologies. Specifically, on separate visits to the contractors, with program office personnel present, we asked the contractors' relevant technology managers to score the technologies they considered critical to enable their Joint Strike Fighter design to meet DOD requirements for the aircraft. At that time, we also asked them to describe their plans to mature the technologies to the planned start of the engineering and manufacturing development phase, then scheduled for April 2001. Upon reviewing these scores with the program office and in order to gain an overall Joint Strike Fighter Program perspective on technical maturity, the Joint Strike Fighter office agreed to provide us with TRL scores for the eight technologies they considered critical for meeting program cost and performance requirements. Figure 2 reflects the program office scores at the time of our last review. Due to the current Joint Strike Fighter competition, the specific technologies mentioned previously are not linked to scores so as not to divulge competition sensitive information. As the figure shows, all eight technologies were projected to be below the level of maturity (TRL 7) considered acceptable for low risk when entering the engineering and manufacturing development phase and six of the technologies were projected to be below the level of maturity (TRL 6) that is considered low risk for entering the demonstration phase, which the Joint Strike Fighter Program began in 1996. During our current review, we again visited the two competing contractors to discuss the status of the eight technologies. We learned that they have essentially accomplished, or plan to accomplish by October 2001, the technology development and demonstrations that they planned to accomplish as of April 2001. Thus figure 2 represents the current assessment of technical maturity. While two of these areas are very close to appropriate maturity levels, the Joint Strike Fighter's critical technologies are not projected to be matured to levels that we believe would indicate a low risk program at the planned start of the engineering and manufacturing development phase. Key component technologies remain at higher risk levels for engineering and manufacturing development because (1) they have not been developed to approximately the same size, weight, and configuration called for in the final aircraft design and/or (2) they have not been demonstrated to work in an environment similar to the planned operational system. The Joint Strike Fighter Program has made good progress in some technology areas. For example, contractor and program officials told us that because of concerns about propulsion technology, both contractors focused considerable attention on that area. Both contractors flew aircraft that demonstrated the capability for short take-off and vertical landing and accumulated at least 20 hours of flight time on those aircraft, which should satisfy the requirement in the Fiscal Year 2001 National Defense Authorization Act. In some other areas, the technology maturation has not been uniform across all critical components of a technology. For example, the radar has a number of critical components that must work together as a system. Both contractors have made considerable progress on one or more of those components, but the other critical components have not been matured to an acceptable level of risk. In order for this technology to achieve a TRL level of 7, all components had to be (1) demonstrated in the size and weight required to meet aircraft capabilities, (2) integrated together as they would be in the final aircraft design, and (3) flown in an environment similar to what the Joint Strike Fighter will be subjected. To demonstrate some critical technologies, both contractors flew key electronic and other components in flying avionics test beds (commercial aircraft reconfigured as flying laboratories). While these tests occurred in a relevant environment (e.g., in flight), the tested hardware was not always the same size and weight required for the Joint Strike Fighter aircraft. Conversely, some components were built to the required size and weight, but were demonstrated only in ground-testing environments. By not having matured all critical technology areas to appropriate maturity levels, the program remains at risk for achieving cost and performance goals upon entering product development. Moving into engineering and manufacturing development creates an expectation that the Joint Strike Fighter can be delivered for a stated time and dollar investment and with a given set of capabilities. The decisions the Department of Defense makes now and over the next 2 years will largely determine whether those expectations can be met. A key component of the Joint Strike Fighter Program's acquisition strategy is to enter the engineering and manufacturing development phase with low technical risk. The program will not have achieved that point by October 2001 because technologies, which the Joint Strike Fighter Program Office identified as critical to meeting the program's cost and requirements objectives, will not have been matured to an acceptable risk level. By entering the engineering and manufacturing development phase with immature critical technologies, the program will need to continue to develop those technologies at the same time it will be concentrating on production issues and the integration of subsystems into a Joint Strike Fighter. This approach would not be consistent with best practices. In fact, it would more closely follow DOD's traditional practices in weapon system programs that have often resulted in cost increases, schedule delays, and compromised performance. To eliminate one of the major sources of cost and schedule risk, we recommend that the Secretary of Defense delay the start of engineering and manufacturing development until critical technologies are matured to acceptable levels. Alternatively, if the Secretary of Defense decides to accept these risks and move the program into engineering and manufacturing development as scheduled, we recommend that the Secretary dedicate the resources to ensuring that maturity of the critical technologies is demonstrated by the critical design review or defer the inclusion of immature technologies from the approved design. In written comments on a draft of this report, the Director of Strategic and Tactical Systems, within the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics, partially concurred with our recommendation. DOD contended that an independent technology readiness assessment it carried out on the program showed that technology has extensively matured and the program is now ready to enter into systems development and demonstration. DOD also stated that the Joint Strike Fighter Program Office has implemented a risk management program that will continue to monitor and address technology risks, as well as other risks, throughout the program's life. The full text of DOD's comments is included in appendix III. We disagree with the Department's assessment of technological maturity. The TRL assessment conducted as part of our review showed that technologies critical to the Joint Strike Fighter Program are not projected to be matured to levels that we believe would indicate a low risk program at the planned start of the engineering and manufacturing development phase. Many of the technologies have not been demonstrated in their appropriate size and weight, nor have they been demonstated to function in an environment in which they will be used. For example, many of the technologies are still in the laboratory and will require considerable maturation before they can be incorporated into the final design. By entering the engineering and manufacturing development phase with immature critical technologies, the program will need to continue to develop those technologies at the same time it will be concentrating on engineering, designing, and fabricating the product. As it has with many other DOD programs, this approach increases the likelihood of schedule delays and program cost increases. This is primarily why DOD's new acquisition regulations emphasize separating technology development from product development. In fact, experience has shown that resolving technology problems in product development can result in at least a ten- fold cost increase. Moreover, DOD incorrectly states that the tools it used to assess its technology and the TRLs used for our review are equivalent methodologies for assessing technological maturity. The Willoughby Templates used by DOD are a risk management tool. They can be an excellent way to manage program risks, but in practice they have not been used to identify risk. Identifying risk is the first step to managing it. By contrast, by focusing specifically on assessing technology maturity against objective standards, TRLs have proven successful at identifying risks. A more appropriate approach for DOD to take is to use technology readiness levels in conjunction with a management tool such as the Willoughby templates since this can result in more informed decision making and fewer unanticipated problems in an acquisition program. In fact, the Joint Strike Fighter program provides DOD with an excellent opportunity to apply these concepts in tandem. To assess whether the Joint Strike Fighter's critical technologies are projected to mature to low technical risk at the start of the engineering and manufacturing development phase, we used the technology readiness level tool and information provided by Joint Strike Fighter program officials and contractor officials at the Boeing Company, Seattle, Washington; Lockheed Martin Aeronautics Company, Fort Worth, Texas; and Pratt & Whitney, East Hartford, Connecticut. During our previous review, we had obtained detailed briefings from Boeing and Lockheed Martin officials on their plans to mature critical technologies prior to the date for awarding the engineering and manufacturing development contract, then scheduled for April 2001. We had also obtained program office and contractor assessments of the expected technology readiness levels for the critical technologies at April 2001. During our current review, we obtained detailed briefings from program office personnel on the status of critical technologies. We also obtained detailed briefings from Boeing, Lockheed Martin, and Pratt & Whitney officials on the contractors' progress in maturing critical technologies and any further maturation plans through October 2001. We compared the latest information from the program office and the contractors to the information obtained during our prior review to determine if the critical technologies had been matured to higher technology readiness levels and the levels achieved. We conducted our review from April through September 2001 in accordance with generally accepted government auditing standards. We are sending copies of this report to the congressional defense committees; the Honorable Donald H. Rumsfeld, Secretary of Defense; the Honorable James G. Roche, Secretary of the Air Force; the Honorable Gordon R. England, Secretary of the Navy; General James L. Jones, Commandant of the Marine Corps; and the Honorable Mitchell E. Daniels, Jr., Director, Office of Management and Budget. We will also make copies available to other interested parties on request. Please contact me at (202) 512-4841 if you or your staff have any questions concerning this report. Key contributors to this report were Robert Pelletier and Brian Mullins. 6. System/subsystem model or prototype demonstration in a relevant environment. 7. System prototype demonstration in an operational environment. Description Lowest level of technology readiness. Scientific research begins to be translated into applied research and development. Examples might include paper studies of a technology's basic properties. Invention begins. Once basic principles are observed, practical applications can be invented. The application is speculative and there is no proof or detailed analysis to support the assumption. Examples are still limited to paper studies. Active research and development is initiated. This includes analytical studies and laboratory studies to physically validate analytical predictions of separate elements of the technology. Examples include components that are not yet integrated or representative. Basic technological components are integrated to establish that the pieces will work together. This is relatively "low fidelity" compared to the eventual system. Examples include integration of "ad hoc" hardware in a laboratory. Fidelity of breadboard technology increases significantly. The basic technological components are integrated with reasonably realistic supporting elements so that the technology can be tested in a simulated environment. Examples include "high fidelity" laboratory integration of components. Representative model or prototype system, which is well beyond the breadboard tested for TRL 5, is tested in a relevant environment. Represents a major step up in a technology's demonstrated readiness. Examples include testing a prototype in a high fidelity laboratory environment or in simulated operational environment. Prototype near or at planned operational system. Represents a major step up from TRL 6, requiring the demonstration of an actual system prototype in an operational environment, such as in an aircraft, vehicle, or space. Examples include testing the prototype in a test bed aircraft. Technology has been proven to work in its final form and under expected conditions. In almost all cases, this TRL represents the end of true system development. Examples include developmental test and evaluation of the system in its intended weapon system to determine if it meets design specifications. Actual application of the technology in its final form and under mission conditions, such as those encountered in operational test and evaluation. In almost all cases, this is the end of the last "bug fixing" aspects of true system development. Examples include using the system under operational mission conditions. Appendix II: Critical Technologies and Their Descriptions Description Involves the ability to detect and isolate the cause of aircraft problems and then predict when maintenance activity will have to occur on systems with pending failures. Life-cycle cost savings are dependent on prognostics and health management through improved sortie generation rate, reduced logistics and manpower requirements, and more efficient inventory control. Includes integration of propulsion, vehicle management system, and other subsystems as they affect aircraft stability, control, and flying qualities (especially short take-off and vertical landing). Aircraft improvements are to reduce pilot workload and increase flight safety. Includes areas of electrical power, electrical wiring, environmental control systems, fire protection, fuel systems, hydraulics, landing gear systems, mechanisms, and secondary power. Important for reducing aircraft weight, decreasing maintenance cost, and improving reliability. Involves designing an integrated support concept that includes an aircraft with supportable stealth characteristics and improved logistics and maintenance functions. Life-cycle cost savings are expected from improved low observable maintenance techniques and streamlined logistics and inventory systems. Includes the ability to use commercial-based processors in an open architecture design to provide processing capability for radar, information management, communications, etc. Use of commercial processors reduces development and production costs and an open architecture design reduces future development and upgrade costs. Includes advanced integration of communication, navigation, and identification functions and electronic warfare functions through improved apertures, antennas, modules, radomes, etc. Important for reducing avionics cost and weight, and decreasing maintenance cost through improved reliability. Involves lean, automated, highly efficient aircraft fabrication and assembly techniques. Manufacturing costs should be less through improved flow time, lower manpower requirements, and reduced tooling cost. Involves decreasing pilot workload by providing information for targeting, situational awareness, and survivability through fusion of radar, electronic warfare, and communication, navigation, and identification data. Improvements are achieved through highly integrated concept of shared and managed resources, which reduces production costs, aircraft weight, and volume requirements, in addition to improved reliability.
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The Joint Strike Fighter Program (JSFP), the military's most expensive aircraft program, is intended to produce affordable, next-generation aircraft to replace aging aircraft in military inventories. Although JSFP has made good progress in some technology areas, the program may not meet its affordability objective because critical technologies are not projected to be matured to levels GAO believes would indicate a low risk program at the planned start of engineering and manufacturing development in October 2001.
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Stealth-related commodities and technology are sensitive for many reasons. When incorporated into advanced weapon systems, stealth technology greatly improves the effectiveness of forces. The United States is the world leader in stealth technology, and this lead has given U.S. forces a clear battlefield advantage as was demonstrated in Operation Desert Storm. Stealth-related commodities are sensitive from an export control perspective because some of the materials and processes involved have civil applications that make it difficult to control the commodities' dissemination and retain U.S. leadership in stealth technology. Stealth designs incorporate materials, shapes, and structures in a functional system that can meet mission requirements. Stealth techniques fall into two general groups. First, a material may deflect an incoming radar signal into neutral space thereby preventing the source radar from picking up the radar reflection and "seeing" the object. Second, a material may simply absorb an incoming radar signal, not allowing the signal to reflect back to its source. In addition to materials, measurement gear used to test radar-absorbing properties and technologies and software related to manufacturing and application techniques are also considered sensitive from an export control perspective. DOD's policy on the commercial export of stealth technology recognizes its military significance and sensitivity while acknowledging that some items with stealth properties have been developed for commercial purposes, are widely available, and are not militarily significant. DOD's policy states that commercial marketing of unclassified, non-DOD funded stealth technology may be permitted on a case-by-case basis after review by appropriate offices and agencies and approval of the required export license. The U.S. export control system is divided into two regimes, one for munitions items under the Arms Export Control Act (AECA) and one for dual-use items (items with both civil and military uses) under the Export Administration Act (EAA). The Department of State controls munitions items through its Office of Defense Trade Controls and establishes the USML, with input from DOD. The Department of Commerce, through its Bureau of Export Administration, controls dual-use commodities (e.g., machine tools) and establishes the CCL. In general, export controls under the EAA are less restrictive than the controls under the AECA. Exporters must determine whether the item they wish to export is on the CCL or the USML and then apply to the appropriate agency for an export license. When there is confusion over which agency controls a commodity, an exporter may ask State to make a commodity jurisdiction determination. State, in consultation with the exporter, DOD, Commerce, and other agencies, reviews the characteristics of the commodity and determines whether the item is controlled under the USML or the CCL. Since 1992, the majority of all commodity jurisdiction determinations ruled that the commodity belonged on the CCL and not the USML. On the USML, stealth-related commodities are primarily controlled in two general categories. Stealth-related items are controlled under several other categories when the technology is incorporated as part of a system or end item. For example, fighter aircraft that incorporate stealth features are controlled under the category for aircraft. In general, the USML relies on functional descriptions of the items being controlled. Table 1 shows that the USML controls stealth-related exports as parts of several control categories. The CCL, as shown in table 2, controls stealth-related exports under seven export commodity control numbers. In general, the CCL uses more detailed language (often with technical performance criteria) than the USML to describe what is controlled. Because some export control classification numbers cover a broad array of items, some of the exports classified under these numbers are not related to stealth. State and DOD officials acknowledge that the descriptions in the CCL and the USML covering stealth-related items and technology do not clearly define which stealth-related exports are controlled by which agency. State and DOD officials also agree that the lines of jurisdiction should be clarified. DOD officials noted that they are only concerned about militarily significant items or items in the grey area that are potentially militarily significant. A Commerce official noted that overlapping jurisdiction is confusing for exporters and said commodities that fall in the grey area between Commerce and State should be placed on the USML. The Commerce official said that putting grey area cases on the USML would help exporters avoid the (1) confusion of determining where to go for a license and (2) possibility of having their exports seized by a Customs agent who believes the items belong on the USML. The Commerce official cautioned, however, that in moving items to the USML, consideration should be given to whether comparable items are readily available from other countries. State noted in its comments to this report that, under the AECA, foreign availability is not a factor in determining whether an item warrants the national security and foreign policy controls of the USML. Commerce noted in its comments that it does not agree that there is overlapping or unclear jurisdiction over stealth-related commodities and technology between the CCL and the USML. We disagree. As noted in the report, officials from both DOD and State told us that the lines of jurisdiction are unclear and should be clarified. Further, as discussed below, this unclear jurisdiction has led to problems in Commerce's licensing of sensitive stealth-related commodities. Unclear jurisdiction over stealth-related commodities increases the likelihood that militarily sensitive stealth technology will be exported under the less restrictive Commerce export control system. In 1994, Commerce approved two export applications for a radar-absorbing coating determined later to belong on the USML. Although DOD and State have not verified the exact capabilities and military sensitivity of this product, these export licenses illustrate the problems with unclear jurisdiction and authority over stealth-related exports. Commerce approved two applications in 1994 to export a high-performance, radar-absorbing coating. The details of one of the applications was reported in a major trade publication. As reported, the export application described the high-performance claims for the product and indicated that 200 gallons of the material would be used for a cruise missile project headed by a German company. Commerce also granted a license to export the same commodity to another country for use on a commercial satellite. Commerce approved both of these applications in fewer than 10 days and, in accordance with referral procedures, did not refer these applications to either DOD or State. The article reporting Commerce's approval of this material for export noted that the radar frequencies this stealth coating seeks to defend against include those employed by the Patriot antimissile system. In response to that report and subsequent concerns raised by DOD, State performed a commodity jurisdiction review to determine whether the stealth coatings actually belonged under the USML. At this time, the coatings had not yet been shipped overseas. On the basis of State's review that included consultation with both DOD and Commerce, State ruled that the radar-absorbing coating was under the jurisdiction of the USML. After State's ruling, Commerce suspended the export licenses it had approved and the exporter submitted new export applications to State. After State and DOD were unable to obtain adequate information on the exact performance characteristics of the product from the exporter, State decided not to approve the export applications. Commerce's export control authority under the EAA is more limited than State's authority under the AECA. In fact, a high-ranking Commerce official said Commerce probably could not have denied the two applications to export the radar-absorbing coatings. The EAA regulates dual-use exports under national security controls and foreign policy controls. As shown in table 3, the seven stealth-related commodities on the CCL are controlled for national security and missile technology reasons (considered a foreign policy control). National security controls are designed to prevent exports from reaching the former East bloc and Communist nations. Exports that are controlled on the CCL for national security reasons and that are going to noncontrolled countries can only be denied by Commerce if there is evidence the exports will be diverted to a controlled country. Foreign policy controls under the EAA are designed to control exports for specific reasons (e.g., missile technology concerns) and if the exports are going to specific countries (e.g., countries considered to be missile proliferators). In essence, these controls are targeted to specific items, end uses, and/or countries. Consequently, items controlled for missile technology reasons (e.g., most stealth-related commodities), as a practical matter, are not restricted if they are destined for other end uses (e.g., ship applications and aircraft) or for a country not considered to be a missile proliferation threat (e.g., any member of the Missile Technology Control Regime). In contrast, under the AECA, commodities on the USML are controlled to all destinations, and authority to regulate exports is not limited by end use or country. The AECA grants State broad authority to deny export applications based on a determination that the license is against national interests. Commerce referral procedures for the seven stealth-related categories do not require most applications to be sent to either DOD or State for review. Commerce referral procedures depend on the reason the export is controlled and the ultimate destination. As shown in table 4, between fiscal years 1991 and 1994, most applications under the seven export control classification numbers related to stealth were not referred to either DOD or State. During this time, only 15 of 166 applications processed by Commerce were sent to either DOD or State for review. Table 4 also shows, because some export control classification numbers cover a broad array of items, some of the export applications classified under these numbers are not related to stealth. Table 5 lists examples of applications that were referred by Commerce, and table 6 lists applications that were not referred. In general, commodities controlled on the CCL for national security reasons are referred to DOD only if they are going to a controlled country. These referral procedures are based, in part, on agreements between Commerce and DOD. National security controls are designed to prevent exports from going to controlled countries. Consequently, exports of commodities that are controlled for national security reasons and that are going to other destinations are generally not restricted, and Commerce does not refer such applications to DOD. Exports of commodities controlled for missile technology reasons are referred by Commerce only if they meet two key tests. First, the description of the export must fit the definition of missile technology items as described in the Annex to the Missile Technology Control Regime. Some commodities that fall under export commodity control numbers controlled for missile technology may not fit the detailed description of missile technology found in the Annex. Second, the export must be going to a country considered to be of concern for missile technology proliferation reasons. Export applications that Commerce refers based on missile technology concerns are sent to the Missile Technology Export Control group (MTEC). The MTEC is chaired by State with representatives from DOD, Commerce, the U.S. intelligence agencies, and others at the invitation of the Chair and the concurrence of the group. DOD, by being a member of MTEC, has access to missile technology applications that Commerce refers to the group. In a recent report, we noted concerns about Commerce's referral practices for missile-related exports. Only a fraction of the export applications under export control classification numbers controlled for missile technology reasons going to China were sent by Commerce to other agencies for review. According to the current Chair of the MTEC, Commerce does not refer all relevant missile technology applications to the MTEC for review. Commerce officials stated that they refer all relevant cases and noted that the MTEC Chair may be unfamiliar with Commerce referral procedures. State noted in its comments that it would be preferable for the MTEC to review all export licenses for Annex items. In light of the more stringent controls under the AECA and the sensitivity of stealth technology, we recommend that the Secretary of State, with the concurrence of the Secretary of Defense and in consultation with the Secretary of Commerce, clarify the licensing jurisdiction between the USML and the CCL for all stealth-related commodities and technologies with a view toward ensuring adequate controls under the AECA for all sensitive stealth-related items and the Secretary of Commerce revise current licensing referral procedures on all stealth-related items that remain on the CCL to ensure that Commerce refers all export applications for stealth-related commodities and technology to DOD and State for review, unless the Secretaries of Defense and State determine their review of these items is not necessary. We obtained written comments from the Departments of State and Commerce (see apps. I and II). State generally agreed with the analyses and recommendations in the report. State indicated that our first recommendation should be revised to properly reflect State's leading role in determining which items are subject to the AECA (i.e., belong on the USML). State also noted that our second recommendation should be amended to include State in determining whether some stealth-related export licenses need to be referred to State for review for foreign policy reasons. We clarified both recommendations to address State's concerns. Commerce disagreed with our first recommendation stating that the lines of jurisdiction over exports of stealth-related commodities are already clear. As demonstrated in the report, we believe the lines of jurisdiction are unclear. In addition, State, in its comments to this report, concurs with our recommendation to clarify which stealth-related items should be controlled under the USML and the CCL. Commerce also disagreed with our second recommendation indicating that the executive branch has drafted an executive order that would give the relevant agencies authority to review all dual-use license applications. If implemented, this draft executive order may help improve the review of sensitive exports by DOD and State. However, this draft executive order, by itself does not address the need to clarify jurisdiction between the CCL and the USML in light of the military significance and sensitivity of stealth-related technology and the more stringent controls under the AECA. DOD officials provided oral comments on a draft of this report. We made changes to the report as appropriate to address the technical issues they raised. To determine how control over stealth technology is split between the CCL and the USML, we reviewed the two lists and interviewed officials from State's Office of Defense Trade Controls, Commerce's Bureau of Export Administration, DOD's Defense Technology Security Administration, and the Institute for Defense Analyses. To identify the impact of shared jurisdiction over stealth-related items, we reviewed the export controls established in the AECA and the EAA; obtained Commerce export licensing records on computer tape and focused our analysis on licenses processed after the CCL was restructured in 1991; examined Commerce export license application records that had export classification numbers related to stealth technology; and discussed the impacts of shared jurisdiction over stealth with defense and technical experts in DOD's Special Programs Office, the Institute for Defense Analyses, the Defense Technology Security Administration, and officials from the MTEC group, State's Office of Defense Trade Controls, and the Bureau of Export Administration. To assess whether current referral procedures allow DOD to review all stealth-related exports, we examined the referral histories for the stealth-related exports we identified. We conducted our review from June 1994 through April 1995. Our review was performed 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 15 days after its issue date. At that time, we will send copies to other congressional committees and the Secretaries of Defense, State, and Commerce. We will also make copies available to other interested parties upon request. Please contact me at (202) 512-4587 if you or your staff have any questions concerning this report. Major contributors to this report were Davi M. D'Agostino, Jai Eun Lee, and David C. Trimble. The following are GAO's comments on the Department of State's letter dated May 1, 1995. 1. We agree that foreign availability is not relevant in determining whether an item should be controlled on the U.S. Munitions List (USML). Our statement in the draft report concerning foreign availability considerations has been deleted. 2. The report was changed to more accurately describe the Missile Technology Control Regime. 3. We made changes to the report to reflect State's view that Commerce should not "pre-screen" export licenses and that the Missile Technology Export Control group (MTEC) should review all export licenses for Missile Technology Control Regime Annex items. 4. We added a footnote to the report to mention Enhanced Proliferation Controls Initiative referrals. The following are GAO's comments on the Department of Commerce's letter dated May 2, 1995. 1. We agree that the two systems are different. However, as discussed in the report, Commerce's system is less restrictive than State's system. This difference, as Commerce notes, is due to Commerce being responsible for regulating dual-use commodities and State regulating more sensitive military commodities. 2. The rationalization exercise was initiated in 1990 by President Bush to move dual-use items on the USML to the Commerce Control List (CCL), not to examine both control lists for problems of unclear or overlapping jurisdiction. Though some stealth-related commodities were examined during the course of this exercise in 1991, problems of overlapping jurisdiction remain. In addition, as noted in our report, the Department of Defense (DOD) and State officials agree that jurisdiction over stealth-related technology and commodities is ill defined and should be clarified. 3. We do not have responsibility for determining where the lines of jurisdiction between the control lists should be drawn. As we stated in our recommendation, this is the role of the Department of State in consultation with DOD and the Department of Commerce. 4. We made changes to the report to more accurately reflect Commerce's position. 5. We do not suggest that new International Traffic in Arms Regulations controls over dual-use items be implemented. 6. Our draft report acknowledged the role of DOD in establishing referral procedures. We made changes to the final report to further clarify DOD's role. Moreover, in comments on our draft report, State indicated that it would be preferable for Commerce to refer to State all export licenses for Missile Technology Control Regime Annex items regardless of destination. 7. We clarified our use of the term "stealth" in the final report to explain that our review focused primarily on radar cross-section reduction. Consequently, any possible overlap in export controls for other aspects of stealth technology (e.g., technologies and materials related to reducing infrared, acoustic, electromagnetic and visual signatures, and counter low-observables technologies) was not addressed in our report. 8. We made changes to the report to comply with the confidentiality concerns raised by Commerce. 9. Our draft report acknowledges that because some export control classification numbers cover a broad array of items, some of the exports classified under these numbers are not related to stealth. We made changes to the final report to make this point more clearly. We would have preferred to review these applications with technical experts from DOD to determine which applications involved stealth technology. However, in our review examining missile related exports to China, we were prevented from sharing license information with DOD for the purposes of assessing the technology in a sample of Commerce export licenses. Due to Commerce's lengthy administrative requirements for requesting permission to share license information with DOD, we were unable to perform this detailed analysis in the timeframes of our assignment. 10. Commerce states that it has sufficient authority to deny validated license applications for products the U.S. government does not want to export. It points to regional stability controls reached with interagency consensus as examples of its use of such authority. While Commerce could take a more expansive view of its statutory charter, in practice, it has been more restrained. For example, Commerce officials told us they could not have prevented the export of radar-absorbing coatings to Germany for use on a cruise missile. 11. We made changes to the report to clarify our point that items controlled for missile technology reasons are, as a practical matter, not restricted if they are destined for other uses or for a country not considered a missile proliferation threat. 12. The report does not state that Commerce violated its referral procedures for exports going to China that are controlled for missile-technology reasons. Our point is that current referral practices preclude State and DOD from seeing most Commerce license applications for export commodity classification numbers controlled for missile technology reasons. 13. The examples in the table are valid. The license that was returned without action was held by Commerce for 44 days before it was returned. This provided Commerce ample time to refer the case to DOD for review. The other application involved equipment used to make radar cross-section measurements--an important capability in assessing efforts to reduce the radar signature of an aircraft or missile. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO reviewed export controls over stealth-related commodities and technology, focusing on: (1) how control over stealth technology and related commodities is split between the Department of State's U.S. Munitions List (USML) and the Department of Commerce's Commodity Control List (CCL); (2) the impact of shared jurisdiction over stealth-related items; and (3) whether current referral procedures allow the Department of Defense (DOD) to review all stealth-related exports. GAO found that: (1) stealth technology materials fall under the jurisdiction of both USML and CCL; (2) Commerce believes that stealth-related commodities should be placed on USML to avoid confusion and possible seizure by the Customs Service; (3) the unclear jurisdiction over stealth technology may lead to the inappropriate export of militarily-sensitive stealth materials and technology; (4) the less restrictive export controls governing CCL commodities give exporters an incentive to apply for CCL export licenses for USML-covered material; (5) Commerce can deny CCL export licenses only under limited circumstances or for certain destinations, while State has broader authority to deny applications that are against national interests; and (6) the United States cannot ensure that export licenses for stealth-related technology are properly reviewed and controlled because Commerce does not refer all stealth technology export applications to DOD or State for review.
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VA offers a broad array of disability benefits and health care through its Veterans Benefits Administration (VBA) and its Veterans Health Administration (VHA), respectively. VBA provides benefits and services such as disability compensation and VR&E to veterans through its 57 regional offices. The VR&E program is designed to ensure that veterans with disabilities find meaningful work and achieve maximum independence in daily living. VR&E services include vocational counseling, evaluation, and training that can include payment for tuition and other expenses for education, as well as job placement assistance. VHA manages one of the largest health care systems in the United States and provides PTSD services in its medical facilities, community settings, and Vet Centers. VA is a world leader in PTSD treatment and offers PTSD services to veterans. PTSD can result from having experienced an extremely stressful event such as the threat of death or serious injury, as happens in military combat, and is the most prevalent mental disorder resulting from combat. Servicemembers injured in Afghanistan and Iraq are surviving injuries that would have been fatal in past conflicts, due, in part, to advanced protective equipment and medical treatment. However, the severity of their injuries can result in a lengthy transition involving rehabilitation and complex assessments of their ability to function. Many also sustain psychological injuries. Mental health experts predict that because of the intensity of warfare in Afghanistan and Iraq 15 percent or more of the servicemembers returning from these conflicts will develop PTSD. In our January 2005 report on VA's efforts to expedite VR&E services for seriously injured servicemembers returning from Afghanistan and Iraq, we noted that VA instructed its VBA regional offices, in a September 2003 letter, to provide priority consideration and assistance for all VA services, including health care, to these servicemembers. VA specifically instructed regional offices to focus on servicemembers whose disabilities will definitely or are likely to result in military separation. Because most seriously injured servicemembers are initially treated at major MTFs, VA has deployed staff to the sites where the majority of the seriously injured are treated. These staff have included VA social workers and disability compensation benefit counselors. VA has placed social workers and benefit counselors at Walter Reed and Brooke Army Medical Centers and at several other MTFs. In addition to these staff, VA has provided a vocational rehabilitation counselor to work with hospitalized patients at Walter Reed Army Medical Center, where the largest number of seriously injured servicemembers has been treated. To identify and monitor those whose injuries may result in a need for VA disability and health services, VA has asked DOD to share data about seriously injured servicemembers. VA has been working with DOD to develop a formal agreement on what specific information to share. VA requested personal identifying information, medical information, and DOD's injury classification for each listed servicemember. VA also requested monthly lists of servicemembers being evaluated for medical separation from military service. VA officials said that systematic information from DOD would provide them with a way to more reliably identify and monitor seriously injured servicemembers. As of the end of 2004, a formal agreement with DOD was still pending. In the absence of a formal arrangement for DOD data on seriously injured servicemembers, VA has relied on its regional offices to obtain information about them. In its September 2003 letter, VA asked the regional offices to coordinate with staff at MTFs and VA medical centers in their areas to ascertain the identities, medical conditions, and military status of the seriously injured. In regard to psychological injuries, our September 2004 report noted that mental health experts have recognized the importance of early identification and treatment of PTSD. VA and DOD jointly developed a clinical practice guideline for identifying and treating individuals with PTSD. The guideline includes a four-question screening tool to identify servicemembers and veterans who may be at risk for PTSD. VA uses these questions to screen all veterans who visit VA for health care, including those previously deployed to Afghanistan and Iraq. The screening questions are: Have you ever had any experience that was so frightening, horrible, or upsetting that, in the past month, you have had any nightmares about it or thought about it when you did not want to? tried hard not to think about it or went out of your way to avoid situations that remind you of it? were constantly on guard, watchful, or easily startled? felt numb or detached from others, activities, or your surroundings? DOD is also using these four questions in its post-deployment health assessment questionnaire (form DD 2796) to identify servicemembers at risk for PTSD. DOD requires the questionnaire be completed by all servicemembers, including Reserve and National Guard members, returning from a combat theater and is planning to conduct follow-up screenings within 6 months after return. VA faces significant challenges in providing services to servicemembers who have sustained serious physical and psychological injuries. For example, in providing VR&E services, individual differences and uncertainties in the recovery process make it inherently difficult to determine when a seriously injured servicemember will be most receptive to assistance. The nature of the recovery process is highly individualized and depends to a large extent on the individual's medical condition and personal readiness. Consequently, VA professionals exercise judgment to determine when to contact the seriously injured and when to begin services. In our January 2005 report on VA's efforts to expedite VR&E services to seriously injured servicemembers, we noted that many need time to recover and adjust to the prospect that they may be unable to remain in the military and will need to prepare instead for civilian employment. Yet we found that VA has no policy for maintaining contact with those servicemembers who may not apply for VR&E services prior to discharge from the hospital. As a result, several regional offices reported that they do not stay in contact with these individuals, while others use various ways to maintain contact. VA is also challenged by DOD's concern that outreach about VA benefits could work at cross purposes to military retention goals. In our January 2005 report, we stated that DOD expressed concern about the timing of VA's outreach to servicemembers whose discharge from military service is not yet certain. To expedite VR&E services, VA's outreach process may overlap with the military's process for evaluating servicemembers who may be able to return to duty. According to DOD officials, it may be premature for VA to begin working with injured servicemembers who may eventually return to active duty. With advances in medicine and prosthetic devices, many serious injuries no longer result in work-related impairments. Army officials who track injured servicemembers told us that many seriously injured servicemembers overcome their injuries and return to active duty. Further, VA is challenged by the lack of access to systematic data regarding seriously injured servicemembers. In the absence of a formal information-sharing agreement with DOD, VA does not have systematic access to DOD data about the population who may need its services. Specifically, VA cannot reliably identify all seriously injured servicemembers or know with certainty when they are medically stabilized, when they are undergoing evaluation for a medical discharge, or when they are actually medically discharged from the military. VA has instead had to rely on ad hoc regional office arrangements at the local level to identify and obtain specific data about seriously injured servicemembers. While regional office staff generally expressed confidence that the information sources they developed enabled them to identify most seriously injured servicemembers, they have no official data source from DOD with which to confirm the completeness and reliability of their data nor can they provide reasonable assurance that some seriously injured servicemembers have not been overlooked. In addition, informal data-sharing relationships could break down with changes in personnel at either the MTF or the regional office. In our review of 12 regional offices, we found that they have developed different information sources resulting in varying levels of information. The nature of the local relationships between VA staff and military staff at MTFs was a key factor in the completeness and reliability of the information the military provided. For example, the MTF staff at one regional office provided VA staff with only the names of new patients and no indication of the severity of their condition or the theater from which they were returning. Another regional office reported receiving lists of servicemembers for whom the Army had initiated a medical separation in addition to lists of patients with information on the severity of their injuries. Some regional offices were able to capitalize on long-standing informal relationships. For example, the VA coordinator responsible for identifying and monitoring the seriously injured at one regional office had served as an Army nurse at the local MTF and was provided all pertinent information. In contrast, staff at another regional office reported that local military staff did not until recently provide them with any information on seriously injured servicemembers admitted to the MTF. DOD officials expressed their concerns about the type of information to be shared and when the information would be shared. DOD noted that it needed to comply with legal privacy rules on sharing individual patient information. DOD officials told us that information could be made available to VA upon separation from military service, that is, when a servicemember enters the separation process. However, prior to separation, information can only be provided under certain circumstances, such as when a patient's authorization is obtained. Based on our review of VA's efforts to expedite VR&E services to seriously injured servicemembers, we recommended that VA and DOD collaborate to reach an agreement for VA to have access to information that both agencies agree is needed to promote recovery and return to work for seriously injured servicemembers. We also recommended that VA develop policy and procedures for regional offices to maintain contact with seriously injured servicemembers who do not initially apply for VR&E services. VA and DOD generally concurred with our recommendations. VA also told us that its follow-up policies and procedures include sending veterans information on VR&E benefits upon notification of disability compensation award and 60 days later. However, we believe a more individualized approach, such as maintaining personal contact, could better ensure the opportunity for veterans to participate in the program when they are ready. In dealing with psychological injuries such as PTSD, VA also faces challenges in providing services. Specifically, the inherent uncertainty of the onset of PTSD symptoms poses a challenge because symptoms may be delayed for years after the stressful event. Symptoms include insomnia, intense anxiety, nightmares about the event, and difficulties coping with work, family, and social relationships. Although there is no cure for PTSD, experts believe that early identification and treatment of PTSD symptoms may lessen the severity of the condition and improve the overall quality of life for servicemembers and veterans. If left untreated it can lead to substance abuse, severe depression, and suicide. Another challenge VA faces in dealing with veterans with PTSD is the lack of accurate data on its workload for PTSD. Inaccurate data limit VA's ability to estimate its capacity for treating additional veterans and to plan for an increased demand for these services. For example, we noted in our September 2004 report that VA publishes two reports that include information on veterans receiving PTSD services at its medical facilities. However, neither report includes all the veterans receiving PTSD services. We found that veterans may be double counted in these two reports, counted in only one report, or omitted from both reports. Moreover, the VA Office of Inspector General found that the data in VA's annual capacity report, which includes information on veterans receiving PTSD services, are not accurate. Thus, VA does not have an accurate count of the number of veterans being treated for PTSD. In our September 2004 report, we recommended that VA determine the total number of veterans receiving PTSD services and provide facility- specific information to VA medical centers. VA concurred with our recommendation and later provided us with information on the number of Operation Enduring Freedom and Operation Iraqi Freedom veterans that has accessed VA services in its medical centers, as well as its Vet Centers. However, VA acknowledged that estimating workload demand and resource readiness remains limited. VA stated that the provision of basic post-deployment health data from DOD to VA would better enable VA to provide health care to individual veterans and help VA to better understand and plan for the health problems of servicemembers returning from Afghanistan and Iraq. In February 2005, we reported on recommendations made by VA's Special Committee on PTSD; some of the recommendations were long-standing. We recommended that VA prioritize implementation of those recommendations that would improve PTSD services. VA disagreed with our recommendation and stated the report failed to address the many efforts undertaken by the agency to improve the care delivered to veterans with PTSD. We believe our report appropriately raised questions about VA's capacity to meet veterans' needs for PTSD services. We noted that, given VA's outreach efforts, expanded access to VA health care for many new combat veterans, and the large number of servicemembers returning from Afghanistan and Iraq who may seek PTSD services, it is critical that VA's PTSD services be available when servicemembers return from military combat. VA has taken steps to help the nation's newest generation of veterans who returned from Afghanistan and Iraq seriously injured move forward with their lives, particularly those who return from combat with disabling physical injuries. While physical injuries may be more apparent, psychological injuries, although not visible, are also debilitating. VA has made seriously injured servicemembers and veterans a priority, but faces challenges in providing services to both the physically and psychologically injured. For example, VA must be mindful to balance effective outreach with an approach that could be viewed as intrusive. Moreover, overcoming these challenges requires VA and DOD to work more closely to identify those who need services and to share data about them so that seriously injured servicemembers and veterans receive the care they need. Mr. Chairman, this concludes my prepared remarks. I will be happy to answer any questions that you or Members of the Committee might have. For further information, please contact Cynthia A. Bascetta at (202) 512- 7101. Also contributing to this statement were Irene Chu, Linda Diggs, Martha A. Fisher, Lori Fritz, and Janet Overton. VA Health Care: VA Should Expedite the Implementation of Recommendations Needed to Improve Post-Traumatic Stress Disorder Services. GAO-05-287. Washington, D.C.: February 14, 2005. Vocational Rehabilitation: More VA and DOD Collaboration Needed to Expedite Services for Seriously Injured Servicemembers. GAO-05-167. Washington, D.C.: January 14, 2005. VA and Defense Health Care: More Information Needed to Determine if VA Can Meet an Increase in Demand for Post-Traumatic Stress Disorder Services. GAO-04-1069. Washington, D.C.: September 20, 2004. VA Vocational Rehabilitation and Employment Program: GAO Comments on Key Task Force Findings and Recommendations. GAO-04- 853. Washington, D.C.: June 15, 2004. Defense Health Care: DOD Needs to Improve Force Health Protection and Surveillance Processes. GAO-04-158T. Washington, D.C.: October 16, 2003. Defense Health Care: Quality Assurance Process Needed to Improve Force Health Protection and Surveillance. GAO-03-1041. Washington, D.C.: September 19, 2003. VA Benefits: Fundamental Changes to VA's Disability Criteria Need Careful Consideration. GAO-03-1172T. Washington, D.C.: September 23, 2003. High-Risk Series: An Update. GAO-03-119. Washington, D.C.: January 1, 2003. Major Management Challenges and Program Risks: Department of Veterans Affairs. GAO-03-110. Washington, D.C.: January 2003. SSA and VA Disability Programs: Re-Examination of Disability Criteria Needed to Help Ensure Program Integrity. GAO-02-597. Washington, D.C.: August 9, 2002. Military and Veterans' Benefits: Observations on the Transition Assistance Program. GAO-02-914T. Washington, D.C.: July 18, 2002. Disabled Veterans' Care: Better Data and More Accountability Needed to Adequately Assess Care. GAO/HEHS-00-57. Washington, D.C.: April 21, 2000. 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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More than 10,000 U.S. military servicemembers, including members of the National Guard and Reserve, have been injured in the conflicts in Afghanistan and Iraq. Those with serious physical and psychological injuries are initially treated at the Department of Defense's (DOD) major military treatment facilities (MTF). The Department of Veterans Affairs (VA) has made provision of services to these servicemembers a high priority. This testimony focuses on the steps VA has taken and the challenges it faces in providing services to the seriously injured and highlights findings from three recent GAO reports that addressed VA's efforts to provide services to the seriously injured. These services include vocational rehabilitation and employment (VR&E) and health care for those with post-traumatic stress disorder (PTSD). VA has taken steps to provide services as a high priority to seriously injured servicemembers returning from Afghanistan and Iraq. To identify and monitor those who may require VA's services, VA and DOD are working on a formal agreement to share data about servicemembers with serious injuries. Meanwhile, VA has relied on its regional offices to coordinate with staff at MTFs and VA medical centers to learn the identities, medical conditions, and military status of seriously injured servicemembers. For servicemembers with PTSD, VA has taken steps to improve care including developing with DOD a clinical practice guideline for identifying and treating individuals with PTSD. The guideline contains a four-question screening tool, which both VA and DOD use to identify those who may be at risk for PTSD. VA faces significant challenges in providing services to seriously injured servicemembers. For example, the individualized nature of recovery makes it difficult to determine when a seriously injured servicemember will be ready for vocational rehabilitation, and DOD has expressed concern that VA's outreach to servicemembers could affect retention for those whose discharge from military service is uncertain. VA is also challenged by the lack of access to DOD data; although VA staff have developed ad hoc arrangements, such informal agreements can break down. Regarding PTSD, inaccurate data limit VA's ability to estimate its capacity for treating additional veterans and to plan for an increased demand for these services.
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The Bureau puts forth tremendous effort to conduct a complete and accurate count of the nation's population. However, some degree of error in the form of persons missed or counted more than once is inevitable because of limitations in census-taking methods. Because census results are used, among other purposes, to apportion Congress, redraw congressional districts, and allocate federal aid to state and local governments, the size and demographic composition of these coverage errors have become increasingly sensitive since the Bureau was first able to generate detailed data on them during the 1980 Census. However, the Bureau has never used the results of its coverage measurements to correct estimated coverage errors. The Bureau first attempted to measure the accuracy of the census in the 1940s when it compared the census numbers to birth and death certificates and other administrative data using a procedure called demographic analysis. Modern coverage measurement began with the 1980 Census when the Bureau compared census figures to the results of an independent sample survey of the population. Using statistical methods, the Bureau generated detailed measures of the differences among undercounts of particular ethnic, racial, and other groups. In the months that followed, many lawsuits were filed, most contending that the results of the 1980 coverage measurement should have been used to adjust the census. However, the Bureau designed the evaluation to measure errors, not to correct the census results, and the Director of the Census Bureau decided against adopting the adjusted numbers, as they were deemed flawed due to missing and inaccurate data. The quality of the coverage measurement data improved for the 1990 Census, and the Bureau recommended statistically adjusting the results. However, the Secretary of Commerce determined that the evidence to support an adjustment was inconclusive and decided not to adjust the 1990 Census. The adjustment decision was complicated by the fact that the 1990 Census figures had already been released when the coverage measurement results became available in the spring of 1991. The Secretary of Commerce was concerned that two sets of numbers--the actual census results and the adjusted figures--could create confusion and might allow political considerations to play a part in choosing between sets of numbers when the outcome of the choices, such as congressional apportionment, could be known in advance of a decision. To determine the objectives of 2000 Census I.C.M./A.C.E. programs and their results, we reviewed Bureau and other documents that included Federal Register notices; Census Operational Plans; reports to Congress; internal memorandums; research and feasibility studies; and reports of the Executive Steering Committee for Accuracy and Coverage Policy (ESCAP) I and II, which assessed the results of the A.C.E. program and recommended how they should be used. To determine costs for consultants and technical studies for 2000 Census I.C.M./A.C.E. programs, we focused on object class code 25 from the financial management reports to obtain contract data. With Bureau assistance, we identified I.C.M./A.C.E. project accounts and analyzed amounts by fiscal year using the financial management reports generated by the Department of Commerce's Administrative Management System (CAMS). We reviewed and analyzed obligated and expended data for all coverage measurement programs that existed during the 2000 Census for fiscal years 1991 to 2003. We did not audit financial data provided by the Bureau. To determine ways to track future costs, we reviewed current Bureau financial management reports and considered established standards of accounting, auditing, and internal controls. In addition, we met with key Bureau officials to discuss the results of our analysis and obtain their observations and perspectives. The limitations we encountered in the scope of our work on this assignment are as follows. We were unable to determine the complete contractual and technical studies costs of the I.C.M./A.C.E. programs because the Bureau considered any I.C.M./A.C.E.-related costs from fiscal years 1991 through 1995 as part of its general research and development programs and thus did not separately track these costs. Although some costs were tracked in fiscal year 1996, the Bureau still considered these costs as research and development and did not include these costs as I.C.M./A.C.E. program costs. We were unable to identify I.C.M./A.C.E. portions of costs from projects that covered the entire census, such as the 2000 Census Evaluation program. We did not evaluate the propriety of contracts for I.C.M./A.C.E. programs. Our work was performed in Washington, D.C., and at U.S. Census Bureau headquarters in Suitland, Maryland, from June 2002 through October 2002 in accordance with generally accepted government auditing standards. On January 7, 2003, the Secretary of Commerce provided written comments on a draft of this report. We address these comments in the "Agency Comments and Our Evaluation" section, and have reprinted them in appendix I. In planning the 2000 Census, the Bureau developed a new coverage measurement program, I.C.M., that was designed to address the major shortcomings of the 1990 coverage measurement program. However, as shown in table 1, much like similar programs in earlier censuses, the Bureau did not use I.C.M. and its successor program, A.C.E., to adjust the census because of legal challenges, technical obstacles, and the inability to resolve uncertainties in the data in time to meet the deadlines for releasing the data. In designing I.C.M., the Bureau's goal was to produce a single, consolidated count or "one-number" census and thus avoid the controversy of having two sets of census results as occurred during the 1990 Census. Thus, as shown in table 1, the objectives of I.C.M. were to (1) measure census coverage, (2) generate, using statistical sampling and estimation methods, the detailed data required for apportionment, congressional redistricting, and federal program purposes, and (3) produce a one-number census. The Bureau's plans for I.C.M. emerged in response to the unsatisfactory results of the 1990 Census. Although the 1990 headcount was, at that time, the most costly in U.S. history, it produced data that were less accurate than those from the 1980 Census. The disappointing outcome was due in large part to the Bureau's efforts to count housing units that did not mail back their census questionnaires. The operation, known as nonresponse follow-up, where enumerators visited and collected information from each nonresponding housing unit, proved to be costly and error-prone when a higher-than-expected workload and a shortage of enumerators caused the operation to fall behind schedule. The final stages of nonresponse follow- up were particularly problematic. Indeed, while enumerators finished 90 percent of the follow-up workload within 8 weeks (2 weeks behind schedule), it took another 6 weeks to resolve the remaining 10 percent. Moreover, in trying to complete the last portion of nonresponse follow-up cases, the Bureau accepted less complete responses and information from nonhousehold members such as neighbors, which may have reduced the quality of the data. In the years following the 1990 Census, Congress, the Bureau, several organizations, and GAO, concluded that fundamental design changes were needed to reduce census costs and improve the quality of the data. In response, the Bureau reengineered a number of operations for the 2000 Census. For example, to save time and reduce its nonresponse follow-up workload, the Bureau planned to enumerate a sample of the last remaining portion of nonresponse follow-up cases instead of visiting every nonresponding household as it had done in previous censuses. To adjust for enumeration errors, the Bureau developed I.C.M., which was intended to reconcile the original census figures with data obtained from a separate, independent count of a sample of 750,000 housing units using a statistical process called Dual System Estimation. The Bureau believed that this approach offered the best combination of reduced costs, improved accuracy expected at various geographic levels, and operational feasibility. However, concerned about the legality of the Bureau's planned use of sampling and estimation, members of Congress challenged the Bureau's use of I.C.M. in court. In January 1999, the Supreme Court ruled that the Census Act prohibited the use of statistical sampling to generate population data for reapportioning the House of Representatives. Following the Supreme Court ruling, the Bureau planned to produce apportionment numbers using traditional census-taking methods, and provide statistically adjusted numbers for nonapportionment uses of the data such as congressional redistricting and allocating federal funds. The Bureau initiated the A.C.E. program, which was designed to take a national sample of approximately 300,000 housing units to evaluate coverage errors among different population groups and statistically correct for them. Thus, as shown in table 1, the Bureau's objectives for A.C.E. were to (1) measure how many people were missed in the census and how many were erroneously included and (2) produce the detailed data required in time for redistricting and federal program purposes. However, while the Bureau generally conducted A.C.E. in accordance with its plans, the Bureau later determined that the A.C.E. results did not provide a reliable measure of census accuracy and could not be used to adjust the nonapportionment census data. The first decision against A.C.E. occurred in March 2001, when the Acting Director of the Census Bureau recommended to the Secretary of Commerce that the unadjusted census data be used for redistricting purposes. He cited as a primary reason an apparent inconsistency between the population growth over the prior decade, as implied by A.C.E. results, and demographic analysis, which estimated the population using birth, death, and other administrative records. The inconsistency raised the possibility of an unidentified error in either the A.C.E. or census numbers. He reported that the inconsistency could not be resolved prior to April 1, 2001, the legally mandated deadline for releasing redistricting data. The second decision against A.C.E. came in October 2001 when, based on a large body of additional research, ESCAP decided against adjusting census data for allocating federal aid and other purposes, because A.C.E. failed to identify a significant number of people erroneously included in the census, and other remaining uncertainties. According to Bureau officials, it might be possible to use adjusted data to produce intercensal population estimates for federal programs that require this information; however, the Bureau would need to revise the A.C.E. results before any use of the data could be considered. Although I.C.M. and A.C.E. did not meet their formal objectives, they did produce a body of important lessons learned. As the Bureau's current approach for the 2010 Census includes coverage measurement to assess the accuracy of the census (but not necessarily to adjust the numbers themselves), it will be important for the Bureau to consider these lessons as its planning efforts continue. The lessons include (1) developing a coverage measurement methodology that is both technically and operationally feasible, (2) determining the level of geography at which coverage measurement is intended, (3) keeping stakeholders, particularly Congress, informed of the Bureau's plans, and (4) adequately testing the eventual coverage measurement program. 1. A.C.E. demonstrated operational, but not technical feasibility. According to Bureau officials, an important result of the A.C.E. program was that it demonstrated, from an operational perspective only, the feasibility of conducting a large independent field check on the quality of the census. The Bureau canvassed the entire A.C.E. sample area to develop an address list, collected census response data for persons living in the sample areas on census day, and conducted an operation to try and match A.C.E. respondents to census respondents, all independent of the regular census operations and within required time frames. Our separate reviews of two of these operations--interviewing respondents and matching A.C.E. and census data--while raising questions about the impact on final A.C.E. results due to apparently small operational deviations, also concluded that the Bureau implemented those two operations largely as planned. Nevertheless, while the Bureau demonstrated that it could execute A.C.E. field operations using available resources within required time frames, as the Bureau has noted, feasibility also consists of a technical component--that is, whether the A.C.E. methodology would improve the accuracy of the census. Although the Bureau clearly stated in its justification for A.C.E. that the effort would make the census more accurate, as noted earlier, because of unresolved data discrepancies, its experience in 2000 proved otherwise. Moreover, according to the Bureau, because the A.C.E. was designed to correct a census with a net coverage error similar to that observed in previous censuses, the Bureau commented that applying the methodology to the historically low levels of net error observed in the 2000 Census represented a unique and unanticipated challenge for A.C.E. Thus, it will be important for the Bureau to refine its coverage measurement methodology to ensure that it is technically feasible. 2. The level of geography at which the Bureau can successfully measure coverage is unclear. Since the October 2001 decision to not rely on adjusted census data for nonapportionment and nonredistricting purposes, Bureau officials have told us that they now doubt whether census data can reliably be improved down to the level of geography for which A.C.E. was intended to improve the accuracy--the census tract level (neighborhoods that typically contain around 1,700 housing units and 4,000 people). The Bureau's current position differs from that taken in 2000, when it reported to Congress that it expected accuracy at the tract level to be improved, on average, by A.C.E. statistically adjusting numbers at an even lower level of geography--the census block level. Uncertainty in the level of geography at which accuracy is to be measured or improved can affect the overall design of coverage measurement, as well as its technical feasibility. Therefore, it will be important for the Bureau to determine the level of geography at which it intends to measure accuracy as it decides the role and design of future coverage measurement programs. 3. Keeping stakeholders informed is essential. Throughout the 1990s, Congress and other stakeholders, including GAO, expressed concerns about the Bureau's planned use of sampling and statistical estimation procedures to adjust the census. A key cause of this skepticism was the Bureau's failure to provide sufficiently detailed data on the effects that I.C.M. would have at different levels of geographic detail. Information was also lacking on the various design alternatives being considered, their likely implications, and the basis for certain decisions. As a result, it was difficult for Congress and other stakeholders to support the Bureau's coverage measurement initiatives. For example, on September 24, 1996, the House Committee on Government Reform and Oversight issued a report that criticized the Bureau's initiatives for sampling and statistical estimation. Among other things, the Committee found that the Bureau had not clarified issues of accuracy, particularly for small geographic areas, raised by the sampling initiative. Congress's perspective on the process was later reflected in its enactment of legislation in 1997 that included provisions requiring the Department of Commerce to provide Congress with comprehensive information on its planned use of statistical estimation within 30 days.4. Adequate testing of coverage measurement methodologies is critical. Although the Bureau conducted a dress rehearsal for the census in three locations across the country that was intended to demonstrate the overall design of the census, the 1998 operation did not reveal the problems that the Bureau encountered in dealing with the discrepancies between the 2000 A.C.E. results and its benchmarks. According to Bureau officials, this was partly because the sites were not representative of the nation at large. Additionally, as a result of a compromise between Congress and the administration to simultaneously prepare for a nonsampling census, the I.C.M. was tested at only two of the three dress rehearsal sites--an urban area and an Indian reservation--but was not tested in a rural location as was originally planned. An earlier test in 1995 was also not comprehensive in that it did not test a sampling operation designed to help determine whether nonresponse follow-up of the magnitude projected by the Bureau's current plan could be completed in time for the I.C.M to be done on schedule. From fiscal year 1996 through fiscal year 2001, the Bureau obligated about $207 million for I.C.M./A.C.E. activities. As shown in table 2, of that $207 million, we identified about $22.3 million (11 percent) in obligated amounts for contracts involving more than 170 vendors. These contracts were primarily for technical advisory and assistant services, computer systems support, and training. ($2) (10) (130) (130) Although the Bureau tracked some costs of contracts for the I.C.M./A.C.E. programs, we found that the $22.3 million did not represent the complete contractor costs of the programs because of the following three factors. First, the Bureau only tracked the contractor costs associated with conducting the I.C.M./A.C.E. programs, which covers the period from fiscal year 1997 through 2003. Although life cycle costs for the 2000 Census cover a 13-year period from fiscal years 1991 through 2003, senior Bureau officials said that the I.C.M./A.C.E. program was not viable for implementation until fiscal year 1997. Therefore, the Bureau considered contractor costs from earlier years as part of its general research and development programs, and the Bureau did not assign unique project codes to identify I.C.M./A.C.E. programs and related costs in its financial management system. Second, although $182,000 of fiscal year 1996 obligated contractor costs were identifiable in the Bureau's financial management system as an I.C.M. special test, the Bureau did not consider these costs as part of the I.C.M./A.C.E. programs. Instead, these costs were considered general research and development. However, because the Bureau separately identified these costs as I.C.M. program contractor costs, we have included the $182,000 as part of the I.C.M./A.C.E. program contractor costs in this report. Finally, we were unable to identify the I.C.M./A.C.E. portions of costs that were part of other programs. For example, in late fiscal year 2000 and after, the Bureau did not separate A.C.E. evaluations from its other 2000 Census evaluations in its financial management systems. Bureau officials stated that the contracts for evaluations included overall 2000 Census and A.C.E. evaluations, and did not have a separate code identifying A.C.E. costs. During the 2000 Census, the Bureau, its auditors, and GAO, found extensive weaknesses in the Bureau's financial management system, the components of which include hardware, software, and associated personnel. The weaknesses included difficulties in providing reliable and timely financial information to manage current government operations and preparing financial statements and other reports. Together, they affected the completeness, accuracy, and timeliness of data needed for informed management decisions and effective oversight. In light of these weaknesses, the Bureau's ability to track future costs of coverage measurement activities will largely depend on three factors. First, a sound financial management system is critical. As discussed in our December 2001 report, the Bureau's core financial management system, CAMS, had persistent internal control weaknesses in fiscal year 2000. In its latest financial report, the Bureau indicated that these weaknesses have continued through fiscal year 2001. The Bureau expects to issue its fiscal year 2002 financial report shortly. Second, it would be important to set up project codes to capture coverage measurement activities as early in the planning process as possible. The Bureau did not set up a specific project code to identify I.C.M. program costs until 1996 because, according to Bureau officials, the I.C.M. program was not viable until 1997 and all costs up to this point were considered general research. Finally, it would be important for Bureau personnel to correctly charge the project codes established for the coverage measurement program activities. During the 2000 Census, for example, while the Bureau established a project code and a budget for the remote Alaska enumeration, the project costs were erroneously charged to and commingled with a project code for enumerating special populations. As a result, the actual costs for remote Alaska enumeration were reported by the Bureau's financial management system as zero and are unknown, while enumerating special population costs are overstated. The Bureau's 2000 Census coverage measurement programs did not achieve their primary objectives of measuring the accuracy of the census and adjusting the results because of legal challenges, technical hurdles, and questionable data. However, beyond these formal objectives, there emerged several important lessons learned that Bureau managers should consider because current plans for the 2010 Census include coverage measurement. At the same time, it will also be important for the Bureau to be capable of fully tracking the money it spends on coverage measurement and other census activities so that Congress and other stakeholders can hold the Bureau accountable for achieving intended results. Although the Bureau has never used the results of its coverage measurement programs to adjust census numbers, we believe that an evaluation of the accuracy and completeness of the census is critical given the many uses of census data, the importance of identifying the magnitude and characteristics of any under- and overcounts, and the cost of the census overall. Less clear is whether the results of the coverage measurement should be used to adjust the census. Any Bureau decisions on this matter should involve close consultation with Congress and other stakeholders, and be based on detailed data and a convincing demonstration of the feasibility of the Bureau's proposed approach. Whatever the decision, it is imperative that it be made soon so that the Bureau can design appropriate procedures and concentrate on the business of counting the nation's population. The longer the 2010 planning process proceeds without a firm decision on the role of coverage measurement, the greater the risk of wasted resources and disappointing results. To help ensure that any future coverage measurement efforts achieve their intended objectives and costs can be properly tracked, we recommend that the Secretary of Commerce direct the Bureau to in conjunction with Congress and other stakeholders, come to a decision soon on whether and how coverage measurement will be used in the 2010 Census; consider incorporating lessons learned from its coverage measurement experience during the 2000 Census, such as (1) demonstrating both the operational and technical feasibility of its coverage measurement methods, (2) determining the level of geography at which coverage can be reliably measured, (3) keeping Congress and other stakeholders informed of its plans, and (4) adequately testing coverage measurement prior to full implementation; and ensure that the Bureau's financial management systems can capture and report program activities early in the decennial process and ensure that project costs are monitored for accuracy and completeness. The Secretary of Commerce forwarded written comments from the Census Bureau on a draft of this report, which are reprinted in appendix I. The Bureau agreed with our recommendations highlighting the steps that should be followed in the development of a coverage measurement methodology for the 2010 Census and acknowledged their importance. However, the Bureau maintained that it followed most of these steps for the 2000 Census including (1) keeping stakeholders, particularly Congress, informed of the Bureau's plans, (2) determining the level of geography at which coverage measurement is intended, and (3) adequately testing coverage measurement methodologies. The Bureau also maintained that throughout the 1990s, it had an open and transparent process for implementing the coverage measurement program, including the levels of geography to which its results would be applied. We disagree. As we stated in our report, the Bureau's failure to provide important information was a key cause of congressional skepticism over the Bureau's coverage measurement plans. In fact, Congress was so concerned about the lack of comprehensive information on the Bureau's proposed approach that in July 1997, it passed a law that included provisions requiring the Department of Commerce to provide detailed data on the Bureau's planned use of statistical estimation within 30 days. We revised the report to include this, and provide other examples to further support our position that the Bureau's I.C.M. and A.C.E. planning and development processes were less than fully open and transparent. The Bureau also commented that each major component of the I.C.M./A.C.E. program underwent "rigorous" testing in the middle of the decade as well as during the dress rehearsal for the 2000 Census held in 1998. We believe this overstates what actually occurred. As we noted in the report, the dress rehearsal failed to detect the problems that A.C.E. encountered during the 2000 Census because the sites were not representative of the nation. Additionally, because of an agreement between Congress and the administration to simultaneously prepare for a census that did not include sampling, the I.C.M. was only tested at two of the three dress rehearsal sites--an urban area and an Indian reservation-- but was not tested in a rural location as was originally planned. We made this and other revisions to strengthen our point. Because the A.C.E. was designed to correct a census with a net coverage error similar to that observed in previous censuses, the Bureau commented that applying the methodology to the historically low levels of net error observed in the 2000 Census represented a unique and unexpected challenge for A.C.E. We revised the report to reflect this additional context. The Bureau took exception to the way we presented our conclusions concerning its ability to properly classify certain costs associated with the development of the Bureau's coverage measurement programs. The Bureau noted that it decided not to separately track coverage measurement development costs in 1994, because there was no internal or external request for a separate cost accounting of the program. Our report does not make interpretive conclusions or qualitative judgments about which coverage measurement program costs the Bureau decided to track. Instead, the report (1) points out that we could not identify all of the contractor costs associated with the I.C.M./A.C.E. programs because of the three factors described in the report, and (2) underscores the importance of a sound financial management system for tracking, planning, and development costs for the 2010 Census. We are sending copies of this report to other interested congressional committees, the Secretary of Commerce, and the Director of the U.S. Census Bureau. Copies will be made available to others upon request. This report will also be available at no charge on GAO's home page at http://www.gao.gov. Please contact Patricia A. Dalton on (202) 512-6806 or by E-mail at [email protected] if you have any questions. Other key contributors to this report were Robert Goldenkoff, Roger Stoltz, Carolyn Samuels, Cindy Brown-Barnes, Ty Mitchell, and Linda Brigham. 2000 Census: Complete Costs of Coverage Evaluation Programs Are Not Available. GAO-03-41. Washington, D.C.: October 31, 2002. 2000 Census: Lessons Learned for Planning a More Cost-Effective 2010 Census. GAO-03-40. Washington, D.C.: October 31, 2002. 2000 Census: Refinements to Full Count Review Program Could Improve Future Data Quality. GAO-02-562. Washington, D.C.: July 3, 2002. 2000 Census: Coverage Evaluation Matching Implemented as Planned, but Census Bureau Should Evaluate Lessons Learned. GAO-02-297. Washington, D.C.: March 14, 2002. 2000 Census: Best Practices and Lessons Learned for More Cost-Effective Nonresponse Follow-up. GAO-02-196. Washington, D.C.: February 11, 2002. 2000 Census: Coverage Evaluation Interviewing Overcame Challenges, but Further Research Needed. GAO-02-26. Washington, D.C.: December 31, 2001. 2000 Census: Analysis of Fiscal Year 2000 Budget and Internal Control Weaknesses at the U.S. Census Bureau. GAO-02-30. Washington, D.C.: December 28, 2001. 2000 Census: Significant Increase in Cost Per Housing Unit Compared to 1990 Census. GAO-02-31. Washington, D.C.: December 11, 2001. 2000 Census: Better Productivity Data Needed for Future Planning and Budgeting. GAO-02-4. Washington, D.C.: October 4, 2001. 2000 Census: Review of Partnership Program Highlights Best Practices for Future Operations. GAO-01-579. Washington, D.C.: August 20, 2001. Decennial Censuses: Historical Data on Enumerator Productivity Are Limited. GAO-01-208R. Washington, D.C.: January 5, 2001. 2000 Census: Information on Short- and Long-Form Response Rates. GAO/GGD-00-127R. Washington, D.C.: June 7, 2000. 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. 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To help measure the quality of the 2000 Census and to possibly adjust for any errors, the U.S. Census Bureau (Bureau) conducted the Accuracy and Coverage Evaluation (A.C.E.) program. However, after obligating around $207 million for A.C.E. and its predecessor program, Integrated Coverage Measurement (I.C.M.), from fiscal years 1996 through 2001, the Bureau did not use either program to adjust the census numbers. Concerned about the amount of money the Bureau spent on I.C.M. and A.C.E. programs and what was produced in return, the subcommittee asked us to review the objectives and results of the programs, the costs of consultants, and how best to track future coverage measurement activities. The two programs the Bureau employed to measure the quality of the 2000 Census population data did not meet their objectives. The A.C.E. program achieved results other than those laid out in the Bureau's formal objectives that highlight important lessons learned. They include (1) developing a coverage measurement methodology that is both operationally and technically feasible, (2) determining the level of geography at which coverage measurement is intended, (3) keeping stakeholders, particularly Congress, informed of the Bureau's plans, and (4) adequately testing coverage measurement methodologies. It will be important for the Bureau to consider these as its current plans for the 2010 Census include coverage evaluation to measure the accuracy of the census but not necessarily to adjust the results. Of the roughly $207 million the Bureau obligated for I.C.M./A.C.E. programs from fiscal years 1996 through 2001, we identified about $22.3 million that was obligated for contracts involving over 170 vendors. We could not identify any obligations prior to 1996 in part because the Bureau included them with its general research and development efforts and did not assign the I.C.M./A.C.E. operations unique project codes in its financial management system. To track these costs in the future, it will be important for the Bureau to (1) have a financial management system that has specific project codes to capture coverage measurement costs, (2) establish the project codes as early in the planning process as possible, and (3) monitor the usage of the codes to ensure that they are properly charged.
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Iraq's oil infrastructure is an integrated network that includes crude oil fields and wells, pipelines, pump stations, refineries, gas oil separation plants, gas processing plants, export terminals, and ports (see fig. 1). This infrastructure has deteriorated significantly over several decades due to war damage; inadequate maintenance; and the limited availability of spare parts, equipment, new technology, and financing. Considerable looting after Operation Iraqi Freedom and continued attacks on crude and refined product pipelines have contributed to Iraq's reduced crude oil production and export capacities. Function is to refine crude oil/gas mixture into usable consumer products (fuel oil, diesel, kerosene, benzene, gasoline, LPG, natural gas, etc.) metering stations and transshipment facilities from pipeline to ship for export 2 export terminals, both in 3 major refineries (Bayji in south-Al Basrah Oil Terminal and Khor al Amaya Oil Terminal plants of various sizes and capacities (18 in north and 34 in south) north, Daura in Baghdad, and Basrah in south) and 14 smaller refineries 2 export pipelines, both in north, to Turkey and Syria (gasoline, kerosene, and other petroleum products) Iraq's crude oil reserves, estimated at a total of 115 billion barrels, are the third largest in the world. However, Iraq's ability to extract these reserves has varied widely over time and has been significantly affected by war. Figure 2 shows Iraq's daily average crude oil production levels annually from 1970 through 2006. Iraq's crude oil production reached 3.5 mbpd, its highest annual average, in 1979. In September 1980, Iraq invaded Iran and production levels plummeted. Although the Iran-Iraq War continued until 1988, production levels grew steadily after 1983, peaking at 2.9 million barrels per day in 1989. The Gulf War began the following year when Iraq invaded Kuwait. In January 1991, the United States and coalition partners began a counter- offensive (Operation Desert Storm). Crude oil production once again dropped precipitously and remained relatively low from 1990 to 1996, while Iraq was under UN sanctions. Under the UN Oil for Food program, Iraqi crude oil production began to rebound, peaking at an annual average of 2.6 mbpd in 2000. In the 5 years preceding the 2003 U.S. invasion of Iraq, crude oil production averaged 2.3 mbpd. In 2003, crude oil production dropped again to a low of about 1.3 million barrels per day (annual average) but then rebounded. Despite U.S. and Iraqi government efforts to reconstruct Iraq's key economic sector, oil production has consistently fallen below U.S. program goals. In addition, production levels may be overstated and measuring them precisely is challenging due to limited metering and poor security. Comprehensive metering has been an outstanding goal of the United States, the international community, and the Iraqi government. Key reconstruction goals for Iraq's oil sector, including those for crude oil production and exports, and refined fuel production capacity and stock levels, have not been met. U.S. goals for the oil sector include reaching an average crude oil production capacity of 3 million barrels per day (mbpd) and crude oil export levels of 2.2 mbpd. However, in 2006, actual crude oil production and exports averaged, respectively, about 2.1 mbpd and 1.5 mbpd. Figure 3 compares Iraq's oil production and exports with U.S. goals (the data for this figure are presented in appendix I). As the figure shows, production and exports for the first five months of 2007 were still below U.S. goals. In August 2003, the CPA established a U.S. program goal to increase crude oil production to about 1.3 mbpd. The CPA increased this goal every 2 to 3 months until July 2004, when the goal became to increase crude oil production capacity to 3.0 mbpd. Besides production and export of crude oil, the CPA also established goals for the production of natural gas and liquefied petroleum gas (LPG), as well as the national stocks of refined petroleum products (such as gasoline) that are used to generate energy by consumers and businesses. These CPA goals were to increase production capacity of natural gas to 800 million standard cubic feet per day (mscfd); increase production capacity of LPG to 3,000 tons per day (tpd); and meet demand for benzene (gasoline), diesel, kerosene, and LPG by building and maintaining their stock levels at a 15-day supply. However, the 2006 averages did not meet these goals. To increase the stocks of petroleum products and their availability to consumers, Iraq legalized the importation of petroleum products by private companies to supplement its own production and state-owned company imports. For 2006, the IMF estimated that Iraq's state-owned companies imported about $2.6 billion of petroleum products. At the recommendation of the IMF, the Iraqi government has been reducing subsidies for refined oil products, which raises the prices consumers pay. In the past, refined oil products in Iraq had been highly subsidized, which led to increased demand. Reduction in domestic demand for refined oil products would allow additional crude oil to be exported for revenue rather than refined in Iraq. Iraq's crude oil production statistics may be overstated. We compared the State Department's statistics to those published by the EIA, which are based on alternate sources. Part of EIA's mission is to produce and disseminate statistics on worldwide energy production and use. While these two data sets follow similar trend lines, EIA reports that Iraqi oil production was about 100,000 to 300,000 barrels per day lower than the amounts the State Department reported. At an average price of $50 per barrel, this is a discrepancy of $5 million to $15 million per day, or $1.8 billion to $5.5 billion per year. Figure 4 shows these two data sets over the time period (June 2003 to March 2007) for which data from both State and EIA were available. The data for this figure are presented in appendix I. According to EIA, several factors may account for the discrepancy. One factor is the lack of storage facilities for crude oil in Iraq. Crude oil that cannot be processed by refineries or exported is reinjected into the ground. Another factor affecting the discrepancy may be differences in the frequency and timing of the data. The State Department's data are reported daily in real time, while EIA produces monthly data that have been reviewed and corroborated from several sources. This lag in reporting and longer time period may allow analysts to address inconsistencies such a double counting and reinjection. In addition, the State Department regularly reports on sabotage and interdictions to crude oil pipelines and other disruptions in the crude oil production process. Also, under Saddam Hussein, Iraq had a history of diverting crude oil production to circumvent UN sanctions. Therefore, it is possible that corruption, theft, and sabotage may also be factors in the discrepancy. Reliable information on Iraqi's oil production is further complicated by the lack of metering. According to a State Department oil advisor, meters are in place at many locations but are not usable in many instances due to the difficulties in obtaining needed replacements and spare parts. Without comprehensive metering, crude oil production must be estimated using less precise means, such as estimating the flow through pipelines and relying on reports from onsite personnel rather than an automated system that could be verified. An improved metering system has been a U.S. and international donor priority since early 2004, but implementation has been delayed. In 1996, the UN first cited the lack of oil metering when Iraq was under UN sanctions. In 2004, the International Advisory and Monitoring Board (IAMB) for the Development Fund for Iraq recommended the expeditious installation of metering equipment. According to IAMB, in June 2004, the CPA had approved a budget to replace, repair, and calibrate the metering system on Iraq's oil pipeline network. However, the oil metering contract was not completed due to security and technical issues. In June 2006, IAMB reported that the Iraqi government had entered into an agreement with Shell Oil Company to serve as a consultant for the Ministry of Oil. Shell would advise the ministry on the establishment of a system to measure the flow of oil, gas, and related products within Iraq and in export and import operations. The U.S. government is assisting in this effort by rebuilding one component of the metering system in the Al-Basrah oil port--Iraq's major export terminal--and expects the project to be complete in July 2007. The U.S. government and Iraq face several key challenges in improving Iraq's oil sector. First, the U.S. reconstruction program assumed a permissive security environment that never materialized; the ensuing lack of security resulted in project delays and increased costs. Second, corruption and smuggling have diverted government revenues potentially available for rebuilding efforts. Third, future funding needs for reconstruction of Iraq's oil sector are significant, but the source of these funds is uncertain. The U.S. reconstruction effort was predicated on the assumption that a permissive security environment would exist. However, since May 2003, overall security conditions in Iraq have deteriorated and grown more complex, as evidenced by the increased numbers of attacks (see fig. 5). The average number of daily attacks in June 2007 was about the same level as the prior high of about 180 attacks per day that occurred in October 2006 around the time of Ramadan. Overall, the average number of daily attacks was about 50 percent higher in June 2007 than in June 2006. The deteriorating security environment has led to project delays and increased costs. Insurgents have destroyed key oil infrastructure, threatened workers, compromised the transport of materials, and hindered project completion and repairs by preventing access to work sites. Moreover, looting and vandalism have continued since 2003. U.S. officials reported that major oil pipelines in the north continue to be sabotaged, shutting down oil exports and resulting in lost revenues. For example, according to the Army Corps of Engineers, although eight gas oil separation plants in northern Iraq have been refurbished, many are not running due to interdictions on the Iraq-Turkey pipeline and new stabilization plant. The Corps noted that if the lines and plant were in operation today, an additional 500,000 barrels per day could be produced in northern Iraq. The U.S. government has developed a number of initiatives to protect the oil infrastructure and transfer this responsibility to the Iraqi government. Such efforts include fortifying the infrastructure and improving the capabilities of rapid repair teams and protection security forces such as the Oil Protection Force and the Strategic Infrastructure Battalions (SIB). The U.S. government has paired these security forces with coalition partners and has trained and equipped the SIBs. However, U.S. officials stated that the capability and loyalty of some of these units are questionable. According to Department of Defense (DOD) and Center for Strategic and International Studies reports, these security forces have been underpaid, underequipped, and poorly led, and are sometimes suspected of being complicit in interdiction and smuggling. Additional information on the nature and status of these efforts and the SIBs is classified. U.S. and international officials have noted that corruption in Iraq's oil sector is pervasive. In 2006, the World Bank and the Ministry of Oil's Inspector General estimated that millions of dollars of government revenue are lost each year to oil smuggling or diversion of refined products. According to State Department officials and reports, about 10 percent to 30 percent of refined fuels are diverted to the black market or are smuggled out of Iraq and sold for a profit. According to State Department reporting, Iraqi government officials may have profited from these activities. The insurgency has been partly funded by corrupt activities within Iraq and by skimming profits from black marketers, according to U.S. embassy documents. According to a June 2007 DOD report, a variety of criminal, insurgent, and militia groups engage in the theft and illicit sale of oil to fund their activities. For example, DOD reported that as much as 70 percent of the fuel processed at Bayji was lost to the black market--possibly as much as $2 billion a year. As a result, the Iraqi Army assumed control of the entire Bayji refinery, and equipment is being installed to prevent siphoning. One factor that had stimulated black market activities and fuel smuggling to neighboring countries was Iraq's low domestic fuel prices, which were subsidized by the government. However, under the IMF's Stand-by Arrangement with Iraq, the government has already increased domestic fuel prices several times, significantly reducing the subsidy for many fuel products. The Iraqi government intends to continue the price increases during 2007 and encourage private importation of fuels, which was liberalized in 2006. The purpose is to decrease the incentive for black market smuggling and to increase the availability of fuel products. While billions have been provided to rebuild Iraq's oil sector, Iraq's future needs are significant and sources of funding are uncertain. For fiscal years 2003 through 2006, the United States made available about $2.7 billion, obligated about $2.6 billion, and spent about $2.1 billion to rebuild Iraq's oil sector. According to various estimates and officials, Iraq will need billions of additional dollars to rebuild, maintain, and secure its oil sector. Since the majority of U.S. funds have been spent, the Iraqi government and international community represent important sources of potential future funding. However, the Iraqi government has not fully spent the capital project funds already allocated to the oil sector in Iraq's 2006 budget. In 2006, Iraq planned to spend more than $3.5 billion for capital projects in the oil sector. This amount accounted for about 98 percent of the Ministry of Oil's total budget ($3.6 billion) that year. As of December 2006, the end of Iraq's fiscal year, only 3 percent of oil sector capital project funds had been spent. While Iraq's inability to spend its capital budget may not directly affect U.S.-funded projects, U.S. investment alone is not adequate for the full reconstruction and expansion of the oil sector. Therefore, Iraq's continued difficulties in spending its capital budget could hamper efforts to attain its current reconstruction goals. According to U.S. officials, Iraq lacks the clearly defined and consistently applied budget and procurement rules needed to effectively implement capital projects. For example, the Iraqi ministries are guided by complex laws and regulations, including those implemented under Saddam Hussein, the CPA, and the current government. According to State Department officials, the lack of agreed-upon procurement and budgeting rules causes confusion among ministry officials and creates opportunities for corruption and mismanagement. Additionally, according to the State Department and DOD, personnel turnover within the ministries, fear of corruption charges, and an onerous contract approval process have caused delays in contract approval and capital improvement expenditures. Furthermore, the Iraqi government has not made full use of potential international loans, and future donor funding for the oil sector remains uncertain. Donors other than the United States have not provided any grants to develop the oil sector, and the Iraqi government had not taken advantage of $467 million in loans from Japan to develop a crude oil export facility and upgrade a refinery. According to U.S. and international officials, donor funding has been limited because of an expectation that sufficient funds would be provided through Iraq's oil revenues and private investors. Moreover, it is unclear to what extent the International Compact with Iraq will serve as a viable mechanism to obtain additional donor support for Iraq, particularly for the oil sector. Launched in May 2007, the compact was intended to secure additional funding for Iraq's oil, electricity, and other sectors. However, the extent to which the compact will stimulate international assistance for the oil sector remains uncertain. The World Bank reports that additional incentives are needed to stimulate oil production and investment, including a clear legal and regulatory framework; clearly assigned roles for Iraq's ministries, state agencies, and the private sector; and a predictable negotiating environment for contracts. Iraq has yet to enact and implement comprehensive hydrocarbon legislation that would define the distribution of future oil revenues and the rights of foreign investors. According to U.S. officials, until such legislation is passed and implemented, it will be difficult for Iraq to attract the billions of dollars in foreign investment it needs to modernize the oil sector. As of July 13, 2007, the Iraqi government was in various stages of drafting and enacting four separate, yet interrelated, pieces of legislation: hydrocarbon framework legislation that establishes the structure, management, and oversight for the sector; revenue-sharing legislation (the draft "Law of Financial Resources"); legislation restructuring the Ministry of Oil; and legislation establishing the Iraq National Oil Company (INOC). According to the State Department, to be enacted as law, the four pieces of legislation must be approved by Iraq's cabinet (Council of Ministers), vetted through the Shura council, and then submitted by the cabinet to a vote by Iraq's parliament (Council of Representatives). If the laws are passed, they are then made publicly available in the Iraqi government's official publication, known as the Official Gazette. Figure 6 shows the status of the four proposed pieces of legislation as of July 1, 2007. The draft hydrocarbon framework is the furthest along in the legislative process and is currently before Iraq's parliament, according to a State Department and a KRG official. According to these officials, it provides an overall framework but lacks key details that will be addressed in the financial resources and other legislation. The UN reported in early June 2007 that there had been no decision on whether the hydrocarbon framework legislation would be voted on as a part of a larger energy package with annexes and supporting legislation or voted on separately. The KRG has published the negotiated "agreed-to" text for the revenue- sharing legislation, which has not yet been approved by the cabinet. Negotiated text of the draft legislation for restructuring the Ministry of Oil and establishing INOC have yet to be developed and published. According to a State Department and KRG officials, the passage and implementation of all four pieces of legislation is essential to achieve increased transparency, accountability, and revenue management. Moreover, enacting and implementing hydrocarbon legislation and subsequent regulations and procedures will likely be impeded by some of the same challenges, such as poor security and corruption, that affect achieving program goals and reconstruction of the oil sector. According to U.S. officials, sectarian attacks and the lack of national unity and trust have resulted in competing sectarian interests and wariness of foreign investment. Also, according to U.S. officials, opportunities to profit from corruption and smuggling reduce the incentive for greater transparency and accountability in oil resource management. U.S. officials recognize that significant implementation challenges will remain once the draft legislation is enacted into law. As we recently reported, the United States has spent billions of dollars to rebuild Iraq's oil sector, but billions more will be needed to surmount the challenges facing Iraq's oil sector. Iraq's oil sector lacks an effective metering system to measure output, determine revenue trends, and identify illicit diversions. Opaque laws governing investment have also limited foreign investment in this critical sector. The passage of comprehensive Iraqi hydrocarbon legislation could serve as an important impetus for stimulating additional investment if and when security conditions improve. The development of the sector is also hindered by weak government budgeting, procurement, and financial management systems and limited donor spending. The absence of an integrated strategic plan that coordinates efforts across the oil and electricity sectors is essential given their highly interdependent nature. Such a plan would help identify the most pressing needs for the entire energy sector and help overcome the daunting challenges affecting future development prospects. In our May 2007 report, we recommended that the Secretary of State, in conjunction with relevant U.S. agencies and in coordination with the donor community, work with the Iraqi government and particularly the Ministry of Oil to: 1. Develop an integrated energy strategy for the oil and electricity sectors that identifies and integrates key short-term and long-term goals and priorities for rebuilding, maintaining, and securing the infrastructure; funding needs and sources; stakeholder roles and responsibilities, including steps to ensure coordination of ministerial and donor efforts; environmental risks and threats; and performance measures and milestones to monitor and gauge progress. 2. Set milestones and assign resources to expedite efforts to establish an effective metering system for the oil sector that will enable the Ministry of Oil to more effectively manage its network and finance improvements through improved measures of production, consumption, revenues, and costs. 3. Improve the existing legal and regulatory framework, for example, by setting milestones and assigning resources to expedite development of viable and equitable hydrocarbon legislation, regulations, and implementing guidelines that will enable effective management and development of the oil sector and result in increased revenues to fund future development and essential services. 4. Set milestones and assign resources to expedite efforts to develop adequate ministry budgeting, procurement, and financial management systems. 5. Implement a viable donor mechanism to secure funding for Iraq's future oil and electricity rebuilding needs and for sustaining current energy sector infrastructure improvement initiatives once an integrated energy strategic plan has been developed. In commenting on a draft of our May 2007 report, the State Department agreed that all the steps we included in our recommendations are necessary to improve Iraq's energy sector but stated that these actions are the direct responsibility of the Government of Iraq, not of the Department of State, any U.S. agency, or the international donor community. The State Department also commented that U.S. agencies are already taking several actions consistent with our recommendations. We recognize that these actions are ultimately the responsibility of the Iraqi government. However, it remains clear that the U.S. government wields considerable influence in overseeing Iraq stabilization and rebuilding efforts. We also believe additional actions are warranted given the lack of progress that has been made over the last 4 years in achieving Iraq reconstruction goals. Mr. Chairmen, this concludes my statement. I would be pleased to answer any questions that you or other Members may have at this time. For questions regarding this testimony, please call Joseph A. Christoff at (202) 512-8979 or [email protected]. Other key contributors to this statement were Stephen Lord, Assistant Director; Lynn Cothern; Kathleen Monahan; and Timothy Wedding. Table 1 provides the data used in figures 3 and 4 of this testimony. Department of State data on Iraq's crude oil production and exports are collected by State Department officials in Iraq through Iraq's Ministry of Oil. We calculated Iraq's production for domestic consumption (the amount of oil produced that remains in the country) as the remainder of Iraq's production of crude oil after exports, based on State Department's data. Data from the Department of Energy's Energy Information Administration (EIA) are based on EIA's own analysis and a variety of sources, including Dow Jones, the Middle East Economic Survey, the Petroleum Intelligence Weekly, the International Energy Agency, OPEC's Monthly Oil Market Report, the Oil & Gas Journal, Platts, and Reuters.
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Rebuilding Iraq's oil sector is crucial to rebuilding Iraq's economy. For example, oil export revenues account for over half of Iraq's gross domestic product and over 90 percent of government revenues. This testimony addresses (1) the U.S. goals for Iraq's oil sector and progress in achieving these goals, (2) key challenges the U.S. government faces in helping Iraq restore its oil sector, and (3) efforts to enact and implement hydrocarbon legislation. This statement is based on our May 2007 report and updated data, where appropriate. Despite 4 years of effort and $2.7 billion in U.S. reconstruction funds, Iraqi oil output has consistently fallen below U.S. program goals. In addition, the State Department's data on Iraq's oil production may be overstated since data from the U.S. Department of Energy show lower production levels--between 100,000 and 300,000 barrels less per day. Inadequate metering, re-injection, corruption, theft, and sabotage account for the discrepancy, which amounts to about $1.8 to $5.5 billion per year. Comprehensive metering of Iraq's oil production has been a long-standing problem and continuing need. Poor security, corruption, and funding constraints continue to impede reconstruction of Iraq's oil sector. The deteriorating security environment places workers and infrastructure at risk while protection efforts have been insufficient. Widespread corruption and smuggling reduce oil revenues. Moreover, Iraq's needs are significant and future funding for the oil sector is uncertain as nearly 80 percent of U.S. funds for the oil sector have been spent. Iraq's contribution has been minimal with the government spending less than 3 percent of the $3.5 billion it approved for oil reconstruction projects in 2006. Iraq has yet to enact and implement hydrocarbon legislation that defines the distribution of oil revenues and the rights of foreign investors. Until this legislation is enacted and implemented, it will be difficult for Iraq to attract the billions of dollars in foreign investment it needs to modernize the sector. As of July 13, 2007, Iraq's cabinet has approved only one of four separate but interrelated pieces of legislation--a framework that establishes the structure, management, and oversight. Another part is in draft and two others are not yet drafted. Poor security, corruption, and the lack of national unity will likely impede the implementation of this legislation.
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Seaports are critical gateways for the movement of international commerce. More than 95 percent of our non-North American foreign trade (and 100 percent of certain commodities, such as foreign oil, on which we are heavily dependent) arrives by ship. In 2001, approximately 5,400 ships carrying multinational crews and cargoes from around the globe made more than 60,000 U.S. port calls each year. More than 6 million containers (suitable for truck-trailers) enter the country annually. Particularly with "just-in-time" deliveries of goods, the expeditious flow of commerce through these ports is so essential that the Coast Guard Commandant stated after September 11, "even slowing the flow long enough to inspect either all or a statistically significant random selection of imports would be economically intolerable." This tremendous flow of goods creates many kinds of vulnerability. Drugs and illegal aliens are routinely smuggled into this country, not only in small boats but also hidden among otherwise legitimate cargoes on large commercial ships. These same pathways are available for exploitation by a terrorist organization or any nation or person wishing to attack us surreptitiously. Protecting against these vulnerabilities is made more difficult by the tremendous variety of U.S. ports. Some are multibillion- dollar enterprises, while others have very limited facilities and very little traffic. Cargo operations are similarly varied, including containers, liquid bulk (such as petroleum), dry bulk (such as grain), and iron ore or steel. Amidst this variety is one relatively consistent complication: most seaports are located in or near major metropolitan areas, where attacks or incidents make more people vulnerable. The federal government has jurisdiction over harbors and interstate and foreign commerce, but state and local governments are the main port regulators. The entities that coordinate port operations, generally called port authorities, differ considerably from each other in their structure. Some are integral administrative arms of state or local governments; others are autonomous or semi-autonomous self-sustaining public corporations. At least two--The Port Authority of New York and New Jersey and the Delaware River Port Authority--involve two states each. Port authorities also have varying funding mechanisms. Some have the ability to levy taxes, with voter approval required. At other port authorities, voter approval is not required. Some have the ability to issue general obligation bonds, and some can issue revenue bonds. Some ports receive funding directly from the general funds of the governments they are a part of, and some receive state funding support through trust funds or loan guarantees. A terrorist act involving chemical, biological, radiological, or nuclear weapons at one of these seaports could result in extensive loss of lives, property, and business; affect the operations of harbors and the transportation infrastructure (bridges, railroads, and highways) within the port limits; cause extensive environmental damage; and disrupt the free flow of trade. Port security measures are aimed at minimizing the exploitation or disruption of maritime trade and the underlying infrastructure and processes that support it. The Brookings Institution reported in 2002 that a weapon of mass destruction shipped by container or mail could cause damage and disruption costing the economy as much as $1 trillion. Port vulnerabilities stem from inadequate security measures as well as from the challenge of monitoring the vast and rapidly increasing volume of cargo, persons, and vessels passing through the ports. Port security is a complex issue that involves numerous key actors including federal, state, and local law enforcement and inspection agencies; port authorities; private sector businesses; and organized labor and other port employees. The routine border control activities of certain federal agencies, most notably the Coast Guard, Customs Service, and INS, seek to ensure that the flow of cargo, vessels, and persons through seaports complies with all applicable U.S. criminal and civil laws. Also, the Coast Guard, the Federal Bureau of Investigation, the Transportation Security Administration (TSA), and the Department of Defense (DOD) seek to ensure that critical seaport infrastructure is safeguarded from major terrorist attack. While no two ports in the United States are exactly alike, many share certain characteristics that make them vulnerable to terrorist attacks or for use as shipping conduits by terrorists. These characteristics pertain to both their physical layout and their function. For example: Many ports are extensive in size and accessible by water and land. Their accessibility makes it difficult to apply the kinds of security measures that, for example, can be more readily applied at airports. Most ports are located in or near major metropolitan areas; their activities, functions, and facilities, such as petroleum tank farms and other potentially hazardous material storage facilities, are often intertwined with the infrastructure of urban life, such as roads, bridges, and factories. The sheer amount of material being transported through ports provides a ready avenue for the introduction of many different types of threats. The combination of many different transportation modes (e.g., rail and roads) and the concentration of passengers, high-value cargo, and hazardous materials make ports potential targets. The Port of Tampa illustrates many of these vulnerability characteristics. The port is large and sprawling, with port-owned facilities interspersed among private facilities along the waterfront, increasing the difficulty of access control. It is Florida's busiest port in terms of raw tonnage of cargo, and the cargoes themselves include about half of Florida's volume of hazardous materials, such as anhydrous ammonia, liquid petroleum gas, and sulfur. The port's varied business--bulk freighters and tankers, container ships, cruise ships, fishing vessels, and ship repair and servicing--brings many people onto the port to work daily. For example, in orange juice traffic alone, as many as 2,000 truck drivers might be involved in off loading ships. The Tampa port's proximity to substantial numbers of people and facilities is another reason for concern. It is located close to downtown Tampa's economic core, making attacks on hazardous materials facilities potentially of greater consequence than for more isolated ports. A number of busy public roads pass through the port. In addition, located nearby are facilities such as McDill Air Force Base (the location of the U.S. Central Command, which is leading the fighting in Afghanistan) and the Crystal River nuclear power plant, both of which could draw the attention of terrorists. Since September 11, the various stakeholders involved in ports have undertaken extensive initiatives to begin strengthening their security against potential terrorist threats. As might be expected given the national security aspects of the September 11 attacks, these activities have been most extensive at the federal level. However, states, port authorities, local agencies, and private companies have also been involved. The efforts extend across a broad spectrum of ports and port activities, but the levels of effort vary from location to location. While many federal agencies are involved in aspects of port security, three play roles that are particularly key--the Coast Guard, Customs Service, and INS. The Coast Guard, which has overall federal responsibility for many aspects of port security, has been particularly active. After September 11, the Coast Guard responded by refocusing its efforts and repositioning vessels, aircraft, and personnel not only to provide security, but also to increase visibility in key maritime locations. Some of its important actions included the following: Conducting initial risk assessments of ports. These limited risk assessments, done by Coast Guard marine safety personnel at individual ports, identified high-risk infrastructure and facilities within specific areas of operation. The assessments helped determine how the Coast Guard's small boats would be used for harbor security patrols. The Port of Tampa received one of these assessments, and the Coast Guard increased the frequency of harbor patrols in Tampa. Redeploying assets. The Coast Guard recalled all cutters that were conducting offshore law enforcement patrols for drug, immigration, and fisheries enforcement and repositioned them at entrances to such ports as Boston, Los Angeles, Miami, New York, and San Francisco. Many of these cutters are now being returned to other missions, although some continue to be involved in security-related activities. Strengthening surveillance of passenger-related operations and other high-interest vessels. The Coast Guard established new guidelines for developing security plans and implementing security measures for passenger vessels and passenger terminals, including access controls to passenger terminals and security zones around passenger ships. In Tampa and elsewhere, the Coast Guard established security zones around moored cruise ships and other high-interest vessels, such as naval vessels and tank ships carrying liquefied petroleum gas. The Coast Guard also boarded or escorted many of those vessels to ensure their safe entry into the ports. In some areas, such as San Francisco Bay, the Coast Guard also established waterside security zones adjacent to large airports located near the water. Laying the groundwork for more comprehensive security planning. The Coast Guard began a process for comprehensively assessing the security conditions of 55 U.S. ports over a 3-year period. The agency has a contract with a private firm, TRW Systems, to conduct detailed vulnerability assessments of these ports. The first four assessments are expected to begin in mid-August 2002, following initial work to develop a methodology and identify security standards and best practices that can be used for evaluating the security environment of ports. Tampa is expected to be among the first eight ports assessed under this process. Driving Maritime Security Worldwide. The Coast Guard is working through the International Maritime Organization to improve maritime security worldwide. It has proposed accelerated implementation of electronic ship identification systems, ship and port facility security plans, and the undertaking of port security assessments. The proposals have been approved in a security-working group and will be before the entire organization in December 2002. According to the U.S. Customs Service, it has several initiatives under way in the United States and elsewhere to help ensure the security of cargo entering through U.S. ports. These initiatives include the following: Inspecting containers and other cargoes. Beginning in the summer of 2002, Customs plans to deploy 20 new mobile gamma ray imaging devices at U.S. ports to help inspectors examine the contents of cargo containers and vehicles. Customs is also adapting its computer-based system for targeting containers for inspection. The system, originally designed for the agency's counter-narcotics efforts, flags suspect shipments for inspection on the basis of an analysis of shipping, intelligence, and law enforcement data, which are also checked against criteria derived from inspectors expertise. These new efforts would adjust the system to better target terrorist threats as well. Prescreening cargo. In its efforts to increase security, Customs has entered into an agreement to station inspectors at three Canadian ports to prescreen cargo bound for the United States. The agency has since reached similar agreements with the Netherlands, Belgium, and France to place U.S. inspectors at key ports and initiated similar negotiations with other foreign governments in Europe and Asia. Working with the global trade community. Customs is also engaging the trade community in a partnership program to protect U.S. borders and international commerce from acts of terrorism. In this recent initiative, U.S. importers--and ultimately carriers and other businesses--enter into voluntary agreements with Customs to enhance the security of their global supply chains and those of their business partners. In return, Customs will agree to expedite the clearance of the members' cargo at U.S. ports of entry. INS is also working on a number of efforts to increase border security to prevent terrorists or other undesirable aliens from entering the United States. INS proposes to spend nearly $3 billion on border enforcement in fiscal year 2003--about 75 percent of its total enforcement budget of $4.1 billion. A substantial number of INS's actions relate to creating an entry and exit system to identify persons posing security threats. INS is working on a system to create records for aliens arriving in the United States and match them with those aliens' departure records. The Immigration and Naturalization Service Data Management Improvement Act of 2000 requires the U.S. Attorney General to implement such a system at airports and seaports by the end of 2003, at the 50 land border ports with the greatest numbers of arriving and departing aliens by the end of 2004, and at all ports by the end of 2005. The USA Patriot Act, passed in October 2001, further instructs the U.S. Attorney General and the Secretary of State to focus on two new elements in designing this system--tamper-resistant documents that are machine-readable at ports of entry and the use of biometric technology, such as fingerprint and retinal scanning. Another Act passed by Congress goes further by making the use of biometrics a requirement in the new entry and exit system. A potentially more active agency in the future is the new TSA, which has been directed to protect all transportation systems and establish needed standards. To date, however, TSA has had limited involvement in certain aspects of improving port security. TSA officials report that they are working with the Coast Guard, Customs, and other public and private stakeholders to enhance all aspects of maritime security, such as developing security standards, developing and promulgating regulations to implement the standards, and monitoring the execution of the regulations. TSA, along with the Maritime Administration and the Coast Guard is administering the federal grant program to enhance port security. TSA officials also report that they plan to establish a credentialing system for transportation workers. The Congress is currently considering additional legislation to further enhance seaport security. Federal port security legislation is expected to emerge from conference committee as members reconcile S. 1214 and H.R. 3983. Key provisions of these two bills include requiring vulnerability assessments at major U.S. seaports and developing comprehensive security plans for all waterfront facilities. Other provisions in one or both bills include establishing local port security committees, assessing antiterrorism measures at foreign ports, conducting antiterrorism drills, improving training for maritime security professionals, making federal grants for security infrastructure improvements, preparing a national maritime transportation security plan, credentialing transportation workers, and controlling access to sensitive areas at ports. The Coast Guard and other agencies have already started work on some of the provisions of the bills in anticipation of possible enactment. Some funding has already been made available for enhanced port security. As part of an earlier DOD supplemental budget appropriation for fiscal year 2002, the Congress appropriated $93.3 million to TSA for port security grants. Three DOT agencies--the Maritime Administration, the Coast Guard, and TSA-- screened grant applications and recently awarded grants to 51 U.S. ports for security enhancements and assessments. Tampa received $3.5 million to (1) improve access control, which Tampa Port Authority officials believe will substantially eliminate access to the port by unauthorized persons or criminal elements and (2) install camera surveillance to enforce security measures and to detect intrusions. More recently, Congress passed legislation authorizing an additional $125 million for port security grants, including $20 million for port incident training and exercises. The federal government has jurisdiction over navigable waters (including harbors) and interstate and foreign commerce and is leading the way for the nation's ongoing response to terrorism; however, state and local governments are the main regulators of seaports. Private sector terminal operators, shipping companies, labor unions, and other commercial maritime interests all have a stake in port security. Our discussions with public and private sector officials in several ports indicates that although many actions have been taken to enhance security, there is little uniformity in actions taken thus far. Florida has been a leader in state initiated actions to enhance port security. In 2001--and prior to September 11--Florida became the first state to establish security standards for ports under its jurisdiction and to require these ports to maintain approved security plans that comply with these standards. According to Florida state officials, other states have considered similar legislation. However, according to an American Association of Port Authorities official, Florida is the only state thus far to enact such standards. Although other states have not created formal requirements as Florida has done, there is evidence that many ports have taken various actions on their own to address security concerns in the wake of September 11. State and local port administrators we spoke with at such locations as the South Carolina State Ports Authority and the Port Authority of New York and New Jersey, for example, said they had conducted security assessments of their ports and made some improvements to their perimeter security and access control. At the eight ports where our work has been concentrated thus far, officials reported expending a total of more than $20 million to enhance security since September 11. Likewise, private companies said they have taken some actions, although they have varied from location to location. For example, one shipping company official said that it had performed a security assessment of its own facility; another facility operator indicated that it had assessed its own security needs and added access controls and perimeter security. In addition, private sector officials at the port of Charleston, South Carolina, told us that some facility operators had done more than others to improve their security. The Coast Guard's Captain of the Port in Charleston agreed with their assessment. He said that one petroleum company has tight security, including access control with a sign-in at the gate and visitor's badge and identification checks for everyone entering the facility. Another petroleum facility requires all visitors to watch a safety and security video, while a third petroleum facility had done so little that the Captain characterized security there as inadequate. Several challenges need to be addressed to translate the above initiatives into the kind of enhanced security system that the Congress and other policymakers have envisioned. A significant organizational change appears likely to occur with congressional action to establish a new Department of Homeland Security (DHS), which will integrate many of the federal entities involved in protecting the nation's borders and ports. The Comptroller General has recently testified that we believe there is likely to be considerable benefit over time from restructuring some of the homeland security functions, including reducing risk and improving the economy, efficiency, and effectiveness of these consolidated agencies and programs. Despite the hopeful promise of this significant initiative, the underlying challenges of successfully implementing measures to improve the security of the nation's ports remain. These challenges include implementation of a set of standards that define what safeguards a port should have in place, uncertainty about the amount and sources of funds needed to adequately address identified needs, and difficulties in establishing effective coordination among the many public and private entities that have a stake in port security. One major challenge involves developing a complete set of standards for the level of security that needs to be present in the nation's ports. Adequate standards, consistently applied, are important because lax security at even a handful of ports could make them attractive targets for terrorists interested in smuggling dangerous cargo, damaging port infrastructure, or otherwise disrupting the flow of goods. In the past, the level of security has largely been a local issue, and practices have varied greatly. For example, at one port we visited most port facilities were completely open, with few fences and many open gates. In contrast, another port had completely sealed all entrances to the port, and everyone attempting to gain access to port property had to show identification and state their port business before access to the port was granted. Practices also vary greatly among facilities at a single port. At Tampa, for example, a set of state standards applies to petroleum and anhydrous ammonia tanks on port property; but security levels at similar facilities on private land are left to the discretion of private companies. Development of a set of national standards that would apply to all ports and all public and private facilities is well under way. In preparing to assess security conditions at 55 U.S. ports, the Coast Guard's contractor has been developing a set of standards since May 2002. The Coast Guard standards being developed cover such things as preventing unauthorized persons from accessing sensitive areas, detecting and intercepting intrusions, checking backgrounds of those whose jobs require access to port facilities, and screening travelers and other visitors to port facilities. These standards are performance-based, in that they describe the desired outcome and leave the ports considerable discretion about how to accomplish the task. For example, the standards call for all employees and passengers to be screened for dangerous items or contraband but do not specify the method that must be used for these screenings. The Coast Guard believes that using performance standards will provide ports with the needed flexibility to deal with varying conditions and situations in each location rather than requiring a "cookie-cutter" approach that may not be as effective in some locations as it would be in others. Developing and gaining overall acceptance of these standards is difficult enough, but implementing them seems likely to be far tougher. Implementation includes resolving thorny situations in which security concerns may collide with economic or other goals. Again, Tampa offers a good example. Some of the port's major employers consist of ship repair companies that hire hundreds of workers for short-term projects as the need arises. Historically, according to port authority officials, these workers have included persons with criminal records. However, new state requirements for background checks, as part of issuing credentials, could deny such persons needed access to restricted areas of the port. From a security standpoint, excluding such persons may be advisable; but from an economic standpoint, a company may have difficulty filling jobs if it cannot include such persons in the labor pool. Around the country, ports will face many such issues, ranging from these credentialing questions to deciding where employees and visitors can park their cars. To the degree that some stakeholders believe that the security actions are unnecessary or conflict with other goals and interests, achieving consensus about what to do will be difficult. Another reason that implementation poses a challenge is that there is little precedent for how to enforce the standards. The Coast Guard believes it has authority under current law and regulations to require security upgrades, at both public and private facilities. Coast Guard officials have also told us that they may write regulations to address the weaknesses found during the ongoing vulnerability assessment process. However, the size, complexity, and diversity of port operations do not lend themselves to an enforcement approach such as the one the United States adopted for airports in the wake of September 11, when airports were shut down temporarily until they could demonstrate compliance with a new set of security procedures. In the case of ports, compliance could take much longer, require greater compromises on the part of stakeholders, and raise immediate issues about how compliance will be paid for--and who will bear the costs. Many of the planned security improvements at seaports will require costly outlays for infrastructure, technology, and personnel. Even before September 11, the Interagency Commission on Crime and Security in U.S. Seaports estimated the costs for upgrading security infrastructure at U.S. ports ranging from $10 million to $50 million per port. Officials at the Port of Tampa estimated their cost for bringing the port's security into compliance with state standards at $17 million--with an additional $5 million each year for security personnel and other recurring costs. Deciding how to pay for these additional outlays carries its own set of challenges. Because security at the ports is a concern shared among federal, state, and local governments, as well as among private commercial interests, the issue of who should pay to finance antiterrorism activities may be difficult to resolve. Given the importance of seaports to our nation's economic infrastructure and the importance of preventing dangerous persons or goods from entering our borders, it has been argued by some that protective measures for ports should be financed at the federal level. Port and private sector officials we spoke with said that federal crime, including terrorism, is the federal government's responsibility, and if security is needed, the federal government should provide it. On the other hand, many of the economic development benefits that ports bring, such as employment and tax revenue, remain within the state or the local area. In addition, commercial interests and other private users of ports could directly benefit from security measures because steps designed to thwart terrorists could also prevent others from stealing goods or causing other kinds of economic damage. The federal government has already stepped in with additional funding, but demand has far outstripped the additional amounts made available. For example, when the Congress appropriated $93.3 million to help ports with their security needs, the grant applications received by TSA totaled $697 million--many multiples of the amount available (even including the additional $125 million just appropriated for port security needs). However, it is not clear that $697 million is an accurate estimate of the need because, according to the Coast Guard and Maritime Administration officials, applications from private industry may have been limited because of the brief application period. In Tampa, while officials believe that they need $17 million for security upgrades, they submitted an application for about $8 million in federal funds and received $3.5 million. In the current environment, ports may have to try to tap multiple sources of funding. Tampa officials told us that they plan to use funds from a variety of state, local, and federal sources to finance their required security improvements. These include such sources as federal grants, state transportation funds, local tax and bond revenues, and operating revenues from port tenants. In Florida, one major source for security money has been the diversion of state funds formerly earmarked for economic development projects. According to Florida officials, in 2002, for example, Florida ports have spent virtually all of the $30 million provided by the state for economic development on security-related projects. Ports throughout the nation may have varying abilities to tap similar sources of funding. In South Carolina, for example, where port officials identified $12.2 million in needed enhancements and received $1.9 million in TSA grants, officials said no state funding was available. By contrast, nearby ports in North Carolina, Georgia, and Virginia do have access to at least some state-subsidized funding. South Carolina port officials also reported that they had financed $755,000 in security upgrades with operating revenue, such as earnings from shippers' rental of port-owned equipment, but they said operating revenues were insufficient to pay for much of the needed improvements. These budget demands place pressure on the federal government to make the best decisions about how to use the funding it makes available. Governments also have a variety of policy tools, including grants, regulations, tax incentives, and information-sharing mechanisms to motivate or mandate other lower levels of government or the private sector to help address security concerns, each with different advantages or drawbacks, for example, in achieving results or promoting accountability. Security legislation currently under consideration by the Congress includes, for example, federal loan guarantees as another funding approach in addition to direct grants. Finally, once adequate security measures are in place, there are still formidable challenges to making them work. As we have reported, one challenge to achieving national preparedness and response goals hinges on the federal government's ability to form effective partnerships among many entities. If such partnerships are not in place--and equally important, if they do not work effectively--those who are ultimately in charge cannot gain the resources, expertise, and cooperation of the people who must implement security measures. One purpose in creating the proposed DHS is to enhance such partnerships at the federal level. Part of this challenge involves making certain that all the right people are involved. At the ports we reviewed, the extent to which this had been done varied. The primary means of coordination at many ports are port security committees, which are led by the Coast Guard; the committees offer a promising forum for federal, state, and local government and private stakeholders to share information and make decisions collaboratively. For example, a Captain of the Port told us that coordination and cooperation among port stakeholders at a port in his area of responsibility are excellent and that monthly meetings are held with representation from law enforcement, the port authority, shipping lines, shipping agents, and the maritime business community. However, in another port, officials told us that their port security committees did not always include representatives from port stakeholders who were able to speak for and make decisions on behalf of their organization. An incident that occurred shortly before our review at the Port of Honolulu illustrates the importance of ensuring that security measures are carried out and that they produce the desired results. The Port had a security plan that called for notifying the Coast Guard and local law enforcement authorities about serious incidents. One such incident took place in April 2002, when, as cargo was being loaded onto a cruise ship, specially trained dogs reacted to possible explosives in one of the loads, and the identified pallet was set aside. Despite the notification policy, personnel working for the shipping agent and the private company providing security at the dock failed to notify either local law enforcement officials or the Coast Guard about the incident. A few hours after the incident took place, Coast Guard personnel conducting a foot patrol found the pallet and inquired about it, and, when told about the dogs' reaction, they immediately notified local emergency response agencies. Once again, however, the procedure was less than successful because the various organizations were all using radios that operated on different frequencies, making coordination between agencies much more difficult. Fortunately, the Honolulu incident did not result in any injuries or loss, and Coast Guard officials said that it illustrates the importance of practice and testing of security measures. They also said that for procedures to be effective when needed they must be practiced and the exercises critiqued so the procedures become refined and second nature to all parties. According to a Coast Guard official, since the April incident, another incident occurred where another possible explosive was detected. This time all the proper procedures were followed and all the necessary parties were contacted. One aspect of coordination and cooperation that was lacking in the standard security measures we observed is the sharing of key intelligence about such issues as threats and law enforcement actions. No standard protocol exists for such an information exchange between the federal government and the state and local agencies that need to react to it. In addition, no formal mechanism exists at the ports we visited for the coordination of threat information. State and local officials told us that for their governments to act as partners with the federal government in homeland security, of which port security is a critical part, they need better access to threat information. We identified a broad range of barriers that must be overcome to meet this challenge. For example, one barrier involves security clearances. Officials at the National Emergency Management Association (NEMA), the organization that represents state and local emergency management personnel, told us that personnel in the agencies they represent have difficulty in obtaining critical intelligence information. Although state or local officials may hold security clearances issued by the Federal Emergency Management Agency, other federal agencies, such as the Federal Bureau of Investigation, do not generally recognize these security clearances. Similarly, officials from the National Governors Association told us that because most state governors do not have a security clearance, they cannot receive any classified threat information. This could affect their ability to effectively use the National Guard or state police to prevent and respond to a terrorist attack, as well as hamper their emergency preparedness capability. The importance of information-sharing on an ongoing basis can be seen in an example of how discussions among three agencies, each with its own piece of the puzzle, first failed but then uncovered a scheme under which port operations were being used to illegally obtain visas to enter the United States. The scheme, which was conducted in Haiti, was discovered only after a number of persons entered the United States illegally. Under this scheme, people would apply at the U.S. Consulate in Haiti for entrance visas on the pretext that they had been hired to work on ships that were about to call at the Port of Miami. However, the ships were no longer in service. The Coast Guard knew that these ships were no longer in service, but this information was not known by the State Department (which issued the visas) or INS (which admitted the people into the United States). A Coast Guard official at the Miami Marine Safety Office estimated that hundreds of people entered the country illegally in 2002. Once this was discovered by Coast Guard personnel, they contacted certain American embassies to inform them of the vessels that have been taken out of active service or have been lost at sea and instituted procedures to ensure that the potential crew member was joining a legitimate vessel. The breadth of the challenge of improved coordination and collaboration is evident in the sheer magnitude of the players, even if the proposed DHS is enacted. Coordination challenges will remain among the 22 federal entities that would be brought together in the proposed DHS; between these diverse elements of DHS and the many entities with homeland security functions still outside DHS; and between the full range of federal entities and the myriad of state, local, and private stakeholders. In summary, Mr. Chairman, making America's ports more secure is not a short-term or easy project. There are many challenges that must be overcome. The ports we visited and the responsible federal, state, and local entities have made a good start, but they have a long way to go. While there is widespread support for making the nation safe from terrorism, ports are likely to epitomize a continuing tension between the desire for safety and security and the need for expeditious, open flow of goods both into and out of the country. This completes my prepared statement. I would be pleased to respond to any questions you or other Members of the Subcommittee may have. For information about this testimony, please contact JayEtta Z. Hecker, Director, Physical Infrastructure Issues, on (202) 512-2834. Individuals making key contributions to this testimony included Randy Williamson, Steven Calvo, Jonathan Bachman, Jeff Rueckhaus, and Stan Stenersen. To learn of the vulnerabilities present at ports, the initiatives undertaken since September 11 to mitigate them and the challenges that could impede further progress, we judgmentally selected 10 ports--8 of which we visited--to provide a geographically diverse sample and, in many cases, include ports where special attention had been devoted to security issues. For example, we visited the ports in Tampa, Miami, and Ft. Lauderdale (Port Everglades) because they--like all of Florida's deepwater ports--are required to implement state-mandated security standards, and because they handle large numbers of cruise passengers or large quantities of containerized or bulk cargoes. While in Florida, we also met with state officials from the Office of Drug Control, which developed the port security standards and the legislation codifying them, and from the Department of Law Enforcement, charged with overseeing the implementation of the state standards. In addition, we visited ports in Charleston, South Carolina, and Honolulu, Hawaii, which had been the subject of detailed vulnerability studies by the Defense Threat Reduction Agency (DTRA), in order to determine their progress in implementing the security enhancements recommended by DTRA. For further geographical representation we visited the ports in Oakland, California; Tacoma, Washington; and Boston, Massachusetts, and held telephone discussions with officials from the Port Authority of New York and New Jersey and with the Coast Guard in Guam. At each port visit, we toured the port on land and from the water in order to view the enhancements made since September 11 and the outstanding security needs. We also interviewed officials from the Coast Guard and other public and private sector port stakeholders, such as port authorities, state transportation departments, marine shipping companies, shipping agents, marine pilots, and private terminal operators. To determine federal, state, local, and private initiatives to enhance port security and the implementation challenges, we had several conversations with officials from the Coast Guard headquarters, DTRA, the Maritime Administration, the American Association of Port Authorities, and the private contractor recently hired by the Coast Guard to conduct comprehensive vulnerability assessments at 55 U.S. ports. These discussions included issues related to port security assessments--both completed and planned--communication and coordination with port stakeholders, federal funding of port security enhancements, and other issues. In addition, we analyzed administrative data from the federally funded TSA Port Security Grant Program for additional information on the security needs of ports and the ports' progress since September 11 in enhancing their security. Homeland Security: Critical Design and Implementation Issues (GAO-02-957T, July 17, 2002) Homeland Security: Title III of the Homeland Security Act of 2002 (GAO-02-927T, July 9, 2002) Homeland Security: Intergovernmental Coordination and Partnerships Will Be Critical to Success (GAO-02-899T, July 1, 2002). Homeland Security: New Department Could Improve Coordination but May Complicate Priority Setting (GAO-02-893T, June 28, 2002). Homeland Security: Proposal for Cabinet Agency Has Merit, But Implementation Will be Pivotal to Success (GAO-02-886T, June 25, 2002). Homeland Security: Key Elements to Unify Efforts Are Underway but Uncertainty Remains (GAO-02-610, June 7, 2002). National Preparedness: Integrating New and Existing Technology and Information Sharing into an Effective Homeland Security Strategy (GAO-02-811T, June 7, 2002). Homeland Security: Responsibility And Accountability For Achieving National Goals (GAO-02-627T, April 11, 2002). National Preparedness: Integration of Federal, State, Local, and Private Sector Efforts Is Critical to an Effective National Strategy for Homeland Security (GAO-02-621T, April 11, 2002). Homeland Security: Progress Made; More Direction and Partnership Sought (GAO-02-490T, March 12, 2002). Homeland Security: Challenges and Strategies in Addressing Short- and Long-Term National Needs (GAO-02-160T, November 7, 2001). Homeland Security: A Risk Management Approach Can Guide Preparedness Efforts (GAO-02-208T, October 31, 2001). Homeland Security: Key Elements of a Risk Management Approach (GAO-02-150T, October 12, 2001). Homeland Security: A Framework for Addressing the Nation's Issues (GAO-01-1158T, September 21, 2001).
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Although most of the attention following the September 11 terrorist attacks focused on airport security, an increasing emphasis has since been placed on ports. Ports are inherently vulnerable to terrorist attacks because of their size, generally open accessibility by water and land, metropolitan area location, the amount of material being transported through ports, and the ready transportation links to many locations within the country's borders. Since September 11, federal, state, and local authorities, and private sector stake holders have addressed vulnerabilities in the security of the nation's ports. The Coast Guard has acted as a focal point for assessing and addressing security concerns, anticipating many of the requirements that Congress and the administration are contemplating or have already put into place. Although the proposal to consolidate the federal agencies responsible for border security may offer some long-term benefits, overcoming three challenges will be key to successfully enhancing security at the nation's ports: standards, funding, and collaboration.
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Responsibility for designing and carrying out federal export promotion programs is widely dispersed. Numerous federal agencies have offices across the country and overseas and operate a wide variety of programs that are intended, at least in part, to assist U.S. companies in entering foreign markets or expanding their presence abroad. For example, agencies provide companies with information on market opportunities and help them connect with potential buyers abroad, provide access to export financing, and negotiate with other countries to lower trade barriers. The dispersion of export promotion activities among numerous agencies led us to observe in a 1992 report that "funding for ... agencies involved in export promotion is not made on the basis of an explicit government- wide strategy or set of priorities. Without an overall rationale it is unclear whether export promotion resources are being channeled into areas with the greatest potential return." In 1992, Congress passed the Export Enhancement Act of 1992, which directed the President to establish the TPCC. The TPCC is chaired by the Secretary of Commerce, and its day- to-day operations are carried out by a secretariat that is housed in Commerce's International Trade Administration. The TPCC has 20 members, including 7 core members. Oversight of these agencies is dispersed across many congressional committees. Table 1 identifies the authorizing and appropriating subcommittees with jurisdiction over the seven core TPCC agencies. We have reviewed the TPCC's operations on several occasions since its creation in 1992. We have found that the TPCC and its member agencies have improved coordination in several areas, but we also found shortcomings in the committee's response to the budget-related portions of its mandate. In 2002, we observed that the Secretary of Commerce, as the chair of the TPCC, made recommendations to the President, through OMB, on selected export promotion budget matters on multiple occasions. However, with no authority to reallocate resources among member agencies and occasional agency resistance to its guidance, the TPCC provided limited direction over the use of export promotion resources in support of its strategies. We also noted that the TPCC had not used its National Export Strategies to examine how agencies' resources aligned with their goals, and we recommended that the TPCC consistently do so. The TPCC agreed with our findings and recommendation. However, in 2006 we determined that the committee had not implemented our recommendation; we found that the committee's annual strategies did not review agencies' allocation of resources in relation to identified priorities. In 2009, we observed that the TPCC's most recently published National Export Strategy continued to lack an overall review of agency resource allocations relative to government-wide priorities. Export promotion has recently been emphasized as a high priority for the federal government. In his 2010 Executive Order announcing the NEI, the President emphasized that creating jobs and sustainable economic growth in the United States was his top priority, and that increasing exports was a critical component of those efforts. He also laid out eight priority areas to be addressed through the NEI. OMB subsequently identified the NEI's goal of doubling U.S. exports as one of 14 interim crosscutting priority goals under the GPRA Modernization Act. Additionally, as part of his 2013 and 2014 budget proposals, the President proposed consolidating six departments and agencies involved in export promotion into one new cabinet-level department. In his directives regarding the NEI, the President established a new body, the Export Promotion Cabinet, to develop and implement the initiative. The Export Promotion Cabinet is coordinated by a White House official, has most of the same member agencies as the TPCC, and is to coordinate its efforts with the TPCC. Among other things, the President tasked the Export Promotion Cabinet to work with the TPCC to determine how resources should be allocated. In particular, a February 2012 Presidential Memorandum instructed the Export Promotion Cabinet, in consultation with the TPCC, to evaluate the current allocation of federal government resources, make recommendations to the Director of OMB for their more effective allocation, and propose a unified federal trade budget, consistent with the administration's priorities, to the Director of OMB as part of the annual process for developing the President's budget. The Export Enhancement Act states that the TPCC's strategies should establish a set of priorities for federal export promotion activities and propose a unified federal trade promotion budget that supports the plan. Additionally, we have previously reported that one of the six characteristics of an effective interagency national strategy is that it identifies the resources needed to carry out the strategy. Specifically, an effective national strategy should address what it will cost, the sources and types of resources and investments needed, and where resources and investments should be targeted based on balancing risk reductions with costs. The most recent National Export Strategies, published in 2011 and 2012, outline federal priorities for export promotion, but provide little information on member agencies' resources for carrying out these priorities. Both strategies outline progress made toward the eight NEI priorities and identify specific areas federal agencies will focus on in the coming year. In fact, the 2011 strategy includes the NEI recommendation to "increase the budget for trade promotion infrastructure" as one of five critical recommendations on which TPCC agencies would focus. However, these strategies do not provide summary information on the total resources available for export promotion and do not discuss how resources are currently allocated across priorities. Without this information, decision makers lack a clear understanding of the total federal resources being dedicated to export promotion activities, and it is not possible to assess the appropriate levels or allocations of export promotion resources. The 2011 and 2012 strategies contain very limited discussions on agencies' export promotion resources, consisting only of a few bullets that broadly discuss agencies' budget requests. For example, figure 1 reproduces in its entirety the section in the 2012 report titled "The Administration's FY2013 Trade Promotion Budget." The section includes three bullets relating to agencies' requested export promotion budgets for 2013, but provides no context on the total federal export promotion budget or on the budgets of the individual agencies it discusses. The first bullet, for example, notes that the President's budget proposed $30.3 million in additional funding for the U.S. and Foreign Commercial Service's overseas export promotion activities. However, it does not indicate what the Commercial Service's baseline budget is, whether the increase supports specific priorities laid out in the strategy, or whether resources could be shifted from existing Commerce activities, or from other agencies, to meet these needs. The remaining bullet points do not tie specific funding requests to individual agencies. The second bullet states that the fiscal year 2013 President's budget seeks "support" for SBA's Office of International Trade without stating what amount of funding, if any, SBA is requesting. The final bullet point simply states that five other core TPCC agencies seek a total increase of $19 million over 2012 funding levels. Despite the current emphasis on export promotion as a high-priority goal, the level of detail on agencies' budgets presented in the TPCC's National Export Strategies has decreased. During much of the 1990s, the TPCC provided trade promotion budget information by agency and by activity, noting as it did so that presenting meaningful information across agencies was difficult because of the variety of programs involved. The strategies provided in-depth tables on how agency resources were allocated, for example, the 1997 report included 44 pages of material on this topic. After 2000, the TPCC stopped reporting budget information in such depth. The National Export Strategies from 2002 through 2008 provided only a summary budget table that presented information on each agency's total budget authority for export promotion activities. As already noted, the most recent reports have eliminated these summary budget tables. Figure 2 compares the budget information presented by the TPCC in 1996, 2004, and 2012. TPCC secretariat officials acknowledged that the amount of budget information presented in the National Export Strategies has declined and that the TPCC members currently place little emphasis on displaying or discussing agencies' resources. They noted that changes in the political and budget environment over time have affected the TPCC's processes. First, TPCC secretariat officials said that in the early 2000s, the TPCC shifted its focus away from resources in favor of efforts to improve the management of existing programs. For example, in 2003, a TPCC secretariat memo to member agencies stated that, given the budget environment, agencies should assume their budgets would be flat. The TPCC recommended that agencies look for opportunities to leverage resources through coordination or by sharing costs. Because the TPCC anticipated that members' appropriations would not be increasing, secretariat officials stated that the TPCC largely stopped talking about or examining resources. Officials further noted that, while the NEI has generated enthusiasm for export promotion, the TPCC's current focus remains on better managing and coordinating existing resources. Second, TPCC secretariat officials also stated that because final appropriations have not been passed until later in the fiscal year, it has been more difficult to collect up-to-date budget data. Finally, though GPRA sought to improve agency management and reporting processes, TPCC secretariat officials indicated that, as member agencies increasingly worked to comply with the law in 1999, it hindered their ability to do crosscutting analyses. Officials found that agencies focused on their own specific core priorities and on developing agency-specific performance plans, which complicated the TPCC's ability to obtain and track export promotion budgets. The TPCC periodically collects summary data on agencies' total budget authority for export promotion activities with OMB's assistance. According to OMB staff, OMB asks agencies' budget offices to self-identify their activities that relate to export promotion and compile a summary budget number. OMB resource management offices typically review the numbers provided by the agencies to ensure they are reasonable. Table 2 below reproduces the last table publicly released by the TPCC in its 2008 National Export Strategy, including its footnotes. According to OMB staff, OMB only compiles this information when requested by the TPCC, and the committee last requested this data in the spring of 2011. Because the TPCC opted not to make these data public in that year's National Export Strategy, OMB staff did not fully review them. Therefore, OMB staff requested that we not publish the data collected in 2011. We nevertheless examined the more recent information the TPCC provided us, which included actual budget data for the same member agencies as shown in table 2 from fiscal years 1994 through 2010 and agencies' requested budget for fiscal years 2011 and 2012. The TPCC used the same process to collect data in 2011 that it used for the 2008 National Export Strategy. Therefore, our discussion below, which identifies several significant issues impacting the reliability and usefulness of the data, focuses on the 2011 update but also generally applies to the data presented in table 2. According to TPCC secretariat officials, the committee has initiated efforts to further update this information, but officials have not indicated whether they plan to make it public as part of a future National Export Strategy. The data the TPCC collects are not useful for assessing the allocation of export promotion resources. To be useful for assessing how agencies' resources are allocated, data should, among other things, be consistent and sufficiently comprehensive for the intended purpose. Moreover, collaborating agencies would need to use compatible methods to track funding. Additionally, we have reported on the importance of agencies providing appropriate levels of detail in budgeting documents. For example, prior to the creation of the Department of Homeland Security, we noted that crosscutting funding data provided in an OMB annual report on combating terrorism had limited utility for decision makers, in part because it did not include data on obligations or on duplication in programs for combating terrorism. We identified several issues with the TPCC's most recent data, from 2011, and determined that the data are neither consistent across agencies nor comprehensive enough to indicate how resources are allocated across priorities or the overall cost of carrying out the National Export Strategy. Agencies use different definitions: According to TPCC secretariat and OMB staff, each agency independently defines export promotion and self-identifies the activities to include in its export promotion budget. The TPCC's data include few explanatory notes about how each agency's budget was computed, making it difficult to compare numbers across agencies or understand what activities are included for each agency. In fact, TPCC secretariat officials were not always certain what each agency's number represented. Because agencies use different definitions, there is no assurance that TPCC's data treat similar activities consistently. For example, SBA, OPIC, and Ex-Im all provide some form of export financing, but the TPCC's data for these agencies represent three different aspects of their budgets. SBA's data show the administrative expenses for its Office of International Trade, which is responsible for its export loan programs. OPIC's data capture the agency's total impact on the federal budget but do not provide any indication of the costs of operating its financing programs. Ex-Im's data show the appropriations for its Office of Inspector General, but do not include any information on the costs of operating its financing programs or the agency's total impact on the federal budget. The reasons for including or excluding agencies are not always clear: An example of the lack of clarity in how the TPCC treats member agencies is that its summary budget table does not include USAID, noting that it does not do so because the agency's activities support trade promotion indirectly. However, the TPCC's data include OPIC, which also focuses on international development and only indirectly supports exports. Moreover, the TPCC's table continues to include other agencies, such as the Department of the Treasury, which do not directly fund trade promotion activities. Nonetheless, as we noted in 2006, portions of several National Export Strategies continued to highlight export promotion programs involving USAID. According to TPCC secretariat officials, member agencies decide whether or not they have export promotion programs and whether to provide resource data. The data are not detailed enough to align with priorities: The TPCC's summary budget table presents data at a very high level, with one number for each agency, and provides no information on specific activities or programs. Without greater detail, it is not possible to understand whether or how agency resources are aligned with the priorities laid out in the National Export Strategy and National Export Initiative. Some TPCC member agencies conduct activities in more than one priority area. For example, among other activities, Commerce supports U.S. business in conducting trade missions and also works to reduce barriers to trade, both of which are priority areas in the National Export Initiative. Among its many activities, USDA supports the goals of increasing exports by small and medium-sized enterprises and increasing export credit available to U.S. businesses. Because it only presents information at a high level, the TPCC's table does not allow users to understand how federal resources are being allocated across these, or other, priority areas. The data are not current: The TPCC's data are not comprehensive because they do not include current information about agencies' resources. The TPCC last updated its information in April 2011 and that summary budget table reflected agency budget requests for fiscal year 2012. The President released his fiscal year 2013 budget request in February 2012. Nonetheless, the latest data collected by the TPCC do not reflect fiscal year 2013 requests, nor do they show actual data for 2011, or estimates for 2012. Moreover, because the TPCC opted not to include the data in its National Export Strategy, OMB staff never fully vetted the data collected in 2011. Therefore, the most recent fully vetted data on federal export promotion resources are from 2008. Budget authority data does not fully reflect costs of all agencies' programs: Finally, the TPCC's use of total budget authority data provides an incomplete picture of the costs of some agencies' programs. For example, OPIC is self-funded through receipts collected on its financing activities and has a net negative budget authority, meaning it returns money to the U.S. government. However, it does receive annual instructions from Congress on the amount of money it can spend on administrative and program expenses for its financing programs. While the TPCC's use of total budget authority data may accurately represent one aspect of an agency's impact on the overall federal budget allocated for export promotion, it is not sufficiently detailed to fully understand the agency's contributions toward export promotion. For example, the TPCC's number does not indicate the costs associated with operating OPIC's financing programs or how much financing its budget supports. Without consistent and comprehensive information on export promotion resources, the TPCC cannot accurately assess the levels and allocation of resources among agencies. Thus, decision makers in Congress and the administration do not have full information about the U.S. government's investment in export promotion and cannot determine whether resources are being allocated to the highest priority areas. Further, without information on export promotion resources, neither the TPCC nor the Export Promotion Cabinet can make informed recommendations about their appropriate allocation across agencies. Additionally, the Export Enhancement Act requires the TPCC to identify overlap and duplication among export promotion programs. However, as we have reported, it is difficult to gauge the magnitude of the federal commitment to a particular area of activity or assess the extent to which federal programs are duplicative without a clear understanding of the costs of implementing those programs and the activities they support. According to TPCC secretariat officials, the TPCC does not provide any guidance to agency officials on what budget information should be reported or how agencies should determine which activities should be included as export promotion. In the past, the TPCC provided guidance on the information member agencies should submit on their export promotion budgets. We reported that the data presented by the TPCC fostered a better understanding of historic and potential expenditures. The lack of clear TPCC guidance makes it difficult for agencies to provide, and for the committee to collect, comparable budget information. Without clear guidance, TPCC agencies use different definitions for export promotion in compiling budget information. Many agencies' programs have multiple objectives, some of which are directly related to export promotion and some of which are not. For example, USDA's export promotion programs also fulfill domestic agricultural objectives. According to OMB staff, this makes it challenging to clearly determine what activities should be considered export promotion. OMB staff stated that TPCC secretariat and OMB staff have had some preliminary discussions about developing standardized definitions of what activities should be considered export promotion and how data should be reported. However, these discussions are in the early stages, and the TPCC would need to decide what information it wants to include in the National Export Strategies before moving forward. Similarly, the TPCC does not supply guidance that could help clarify what level of detail agencies should provide to them. As the TPCC noted in its 2000 National Export Strategy, its ability to collect and present detailed budget information is limited by agencies' abilities to generate comparable data within their varied accounting structures. In developing guidance, the TPCC could work with member agencies to determine a reasonable level of detail and identify the limitations of the data. For example, in 2000, the TPCC provided details on agencies' expenditures in major federal export promotion areas, such as combating foreign export subsidies. However, they included a caveat that detailed budget numbers below the overall agency total can be difficult to validate and should only be used as an indication of the resources available for each area. There are lessons to be learned from other bodies coordinating crosscutting government programs and facing similar challenges. For example, like the TPCC, the Office of National Drug Control Policy (ONDCP) has a statutory requirement to develop a national strategy and propose a consolidated budget to implement that strategy. ONDCP's process for developing the National Drug Control Strategy and its associated budget is not a perfect comparison for the TPCC because ONDCP has different authorities for reviewing and suggesting changes to member agencies' budgets. However, its process for collecting and compiling data can highlight the usefulness of providing clear and detailed guidance. ONDCP provides detailed guidance to relevant agencies on how to assemble budget information. Its guidance includes a sample budget table that identifies the level of detail agencies should provide, including a list of the functions, such as corrections or interdiction, agencies should report on. ONDCP's guidance also defines those functions and identifies which activities should be included in each function. In 2011, we reported that, while drug control agency officials raised some concerns about ONDCP's budget process, officials at 4 of 6 agencies stated that it was somewhat or very effective at providing a record of national drug control expenditures, among other things. Clear guidance can help overcome challenges and make the data collected by interagency groups more useful for understanding how resources are currently allocated across agencies and activities, as illustrated by the ONDCP example. The TPCC's lack of guidance impedes the collection of accurate, comprehensive, and consistent information necessary to understand how resources are allocated among priorities. Without clear guidance, TPCC agencies are using nonstandardized definitions to identify activities that relate to export promotion and are not clear about what level of detail is required. In announcing the National Export Initiative, the President not only reemphasized the importance of exports to the U.S. economy, but specifically highlighted the need to understand and coordinate federal resources for export promotion. However, the TPCC does not provide decision makers--including Congress and the Export Promotion Cabinet--with information that provides a clear understanding of how resources are currently allocated across the country and around the world among its member agencies or across federal export promotion priorities. In fact, the amount of information the TPCC has reported on agencies' resources has declined. The TPCC has responded to the National Export Initiative by reporting on efforts to address established priorities and working to improve interagency coordination, but the committee currently places almost no emphasis on understanding the federal resources dedicated to implementing the National Export Strategy, as is called for in good practices. In the absence of clear guidance, the data the TPCC collects are not comparable across agencies and not comprehensive enough to allow the TPCC to determine how resources are currently allocated in support of priority activities. Furthermore, without better resource data, neither the TPCC nor the Export Promotion Cabinet can make informed recommendations about how federal resources should be allocated. As policymakers review the success of the NEI and consider the President's request for authority to consolidate trade agencies in a single department, it is important to understand how federal resources are being spent. Without consistent and comprehensive information on export promotion resources--presented transparently through the TPCC's annual strategies--decision makers in Congress and the administration cannot determine whether the return on the federal investment in export promotion is adequate or make informed decisions about future resource allocations. To improve the consistency, comprehensiveness, and transparency of information provided to Congress and policymakers on the federal investment in export promotion programs, the Secretary of Commerce, as chair of the TPCC, should 1. develop and distribute guidance for member agencies on what information they should provide the TPCC on the resources they spend on export promotion activities, and 2. report in its National Export Strategies on how resources are allocated by agency and aligned with priorities. We provided drafts of this report to the Secretary of Commerce, as chair of the TPCC, and to OMB. In written comments reprinted in appendix II, the Director of the TPCC Secretariat generally concurred with our recommendations on behalf of the Secretary and stated that they intend to work with TPCC member agencies and the Export Promotion Cabinet to implement them. In particular, they plan to create a new TPCC Budget Working Group to establish a robust TPCC role in assessing the appropriate levels and allocation of resources among agencies, as called for in its mandate. TPCC Secretariat officials provided technical comments and suggested corrections and clarifications that we incorporated, when appropriate. Nevertheless, the Director noted the TPCC's limited authority over budget reporting and resource allocations, including its inability to compel member agencies to provide budget and resource information. He gave examples of some challenges they face, including shifts in the political and budgetary landscape and how different Administrations and Congresses have emphasized different priorities over time. However, he said the TPCC Secretariat will work within its existing authorities with TPCC agencies to address our recommendations. We support the establishment of a TPCC Budget Working Group and note that implementing the requirements of the Export Enhancement Act of 1992 is the responsibility of the committee, as comprised of the member agencies, under the leadership of the Chair and with the support of the secretariat. TPCC member discussions that improve the consistency, comprehensiveness, and transparency of information provided to Congress and policymakers can help overcome such challenges, facilitate well-informed resource decisions, and better support the National Export Initiative and the Export Promotion Cabinet. We also requested comments on a draft of this report from OMB. On June 21, OMB's Office of General Counsel provided us with comments via e-mail. OMB noted that, while export promotion budgetary data have not been presented in a public document since the 2008 National Export Strategy, OMB annually compiles and reviews current and proposed resources across TPCC agencies that are devoted to export promotion and trade activities, as part of the development of the President's budget. OMB further stated that it uses these data to ensure prudent government- wide allocation of export promotion-related resources and strong support for the President's export promotion agenda, but that because these data are internal, pre-decisional, and deliberative, OMB does not share the cross-agency table outside of OMB, nor does it publish this information as part of the President's budget or related materials. However, OMB commented that it consults with a number of officials, including the Assistant to the President and Deputy National Security Advisor for International Economics, as head of the Export Promotion Cabinet, when recommending export-promotion related resources in the President's budget. We acknowledge that OMB conducts a review as part of the annual agency budget formulation process. However, this activity is distinct from the TPCC's budget-related requirements in the Export Enhancement Act. As OMB notes, its activities are internal and deliberative and not shared outside OMB, including with the TPCC Secretariat or its member agencies. Thus, OMB's process is not transparent to Congress or to other relevant parties and does not benefit from activities that could improve the consistency or comprehensiveness of this information. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 28 days from the report date. At that time, we will send copies to the Secretary of Commerce (in her capacity as Chairman of the TPCC), as well as the Director of OMB, interested 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- 8612 or [email protected]. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. This report assesses the extent to which the Trade Promotion Coordinating Committee (TPCC) currently compiles and reports information on how budgetary resources are aligned with established export promotion priorities. To address this objective, we analyzed the laws and presidential directives that define what is required of the TPCC as an interagency coordinating body. These included the Export Enhancement Act of 1992, which directed the President to establish the TPCC; the 1993 Executive Order which established the TPCC in accordance with the 1992 act; the 2010 Executive Order announcing the National Export Initiative (NEI); and a subsequent (2012) Presidential Memorandum providing further instruction on Export Promotion Cabinet and TPCC collaboration to maximize the effectiveness of Federal trade programs. We also reviewed GAO's guidance regarding data reliability and examined alternate models and good practices for coordinating and managing multi-agency initiatives as described in other GAO reports, including those covering the Government Performance and Results Act (GPRA) of 1993 and the GPRA Modernization Act of 2010. We reviewed the annual "National Export Strategy" reports to Congress that the TPCC has produced since its inception, focusing in particular on those prepared since the NEI was announced in 2010, as well as TPCC memoranda documenting efforts to compile and report budget information and develop a federal trade promotion budget. We also interviewed staff of the TPCC Secretariat, which is housed in the Department of Commerce, and staff of the Office of Management and Budget (OMB). To assess the reliability and usefulness of budget data collected by the TPCC, we took a number of steps, including (1) reviewing the data for internal consistency; (2) comparing TPCC's data table with select agency budget documents, including Congressional Budget Justifications, appropriations bills, and agency financial or annual reports; (3) reviewing past GAO work on the TPCC's budget; and (4) interviewing knowledgeable TPCC secretariat and OMB staff. Based on this assessment, we identified numerous issues with the TPCC's data, as discussed in detail in this report. We present the TPCC's data in the report only to illustrate our assessment of the data. We conducted this performance audit from February 2013 to July 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Adam Cowles, Assistant Director; Michael McAtee, Analyst-in-Charge; Kara Marshall; and Karen Deans made key contributions to this report. Export Promotion: Small Business Administration Needs to Improve Collaboration to Implement Its Expanded Role. GAO-13-217. Washington, D.C.: January 30, 2013. National Export Initiative: U.S. and Foreign Commercial Service Should Improve Performance and Resource Allocation Management. GAO-11-909, Washington, D.C.: September 29, 2011. International Trade: Effective Export Programs Can Help In Achieving U.S. Economic Goals. GAO-09-480T. Washington, D.C.: March 17, 2009. Export Promotion: Trade Promotion Coordinating Committee's Role Remains Limited. GAO-06-660T. Washington, D.C.: April 26, 2006. Export Promotion: Mixed Progress in Achieving a Governmentwide Strategy. GAO-02-850. Washington, D.C.: September 4, 2002. Export Promotion: Federal Agencies' Activities and Resources in Fiscal Year 1999. GAO/NSIAD-00-118. Washington, D.C.: April 10, 2000. Export Promotion: Issues for Assessing the Governmentwide Strategy. GAO/T-NSIAD-98-105. Washington, D.C.: February 26, 1998. National Export Strategy. GAO/NSIAD-96-132R. Washington, D.C.: March 26, 1996. Export Promotion: Governmentwide Plan Contributes to Improvements. GAO/T-GGD-94-35. Washington, D.C.: October 26, 1993. Export Promotion: Initial Assessment of Governmentwide Strategic Plan. GAO/T-GGD-93-48. Washington, D.C.: September 29, 1993. Export Promotion Strategic Plan: Will It Be a Vehicle for Change? GAO/T-GGD-93-43. Washington, D.C.: July 26, 1993. Export Promotion: Governmentwide Strategy Needed for Federal Programs. GAO/T-GGD-93-7. Washington, D.C.: March 15, 1993. Export Promotion: Federal Programs Lack Organizational and Funding Cohesiveness. GAO/NSIAD-92-49. Washington, D.C.: January 10, 1992.
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In 2010, the President launched the NEI with the goal of doubling U.S. exports over 5 years. More than 2 decades ago, Congress directed the President to establish the TPCC to provide a unifying framework for federal efforts in this area. Among other things, Congress directed the TPCC to assess the appropriate levels and allocations of resources and develop a government-wide strategic plan that identifies federal export promotion priorities, reviews current programs in light of these priorities, and proposes to the President a federal trade promotion budget that supports the plan. Congress also required the TPCC to submit annual reports to Congress describing the required strategic plan. This report assesses the extent to which the TPCC compiles and reports information on how federal export promotion resources are aligned with export promotion priorities. GAO reviewed the laws governing the TPCC and good practices for interagency initiatives, analyzed TPCC budget data and documents, and interviewed TPCC secretariat and Office of Management and Budget staff. The interagency Trade Promotion Coordinating Committee (TPCC) neither reports nor compiles information on how federal export promotion resources align with government-wide priorities. As a result, decision makers lack a clear understanding of the total resources dedicated across the country and around the world by TPCC member agencies to priority areas, such as increasing exports by small- and medium-sized businesses. GAO has previously reported that effective national strategies should address costs and has found shortcomings in the committee's response to the budget-related portions of its mandate. While the TPCC's National Export Strategy reports issued since initiation of the National Export Initiative (NEI) outline government-wide priorities and progress in achieving them, they do not discuss how resources are allocated in support of these priorities. Despite the current emphasis on export promotion as a high-priority goal, recent strategies have provided less information on budget resources than have previous strategies, as shown below. The TPCC last publicly reported a summary budget table in 2008. TPCC secretariat officials acknowledged that the TPCC agencies currently place little emphasis on displaying or discussing agencies' resources in the National Export Strategy. The TPCC last compiled high-level data on member agencies' budget authority in 2011, but this information is not useful for assessing resource allocations. To be useful, data should, among other things, be consistent and sufficiently complete for the intended purpose. However, the TPCC's data are inconsistent across agencies and not detailed enough to facilitate an understanding or comparison of how resources are allocated among priorities. TPCC agencies do not use a common definition of export promotion, so it is unclear why some agencies are included in the TPCC's data and others are not, and the TPCC's data are not current. Although agency accounting systems and budget processes differ, which presents challenges, clear guidance for agencies on what information they should provide the TPCC could improve the quality of the data. Without better information on agencies' export promotion resources, decision makers cannot determine whether the federal investment in export promotion is being used effectively or make informed decisions about future resource decisions. GAO recommends that TPCC (1) develop and distribute guidance for member agencies on what information they should provide the TPCC on the resources they spend on export promotion activities; and (2) report in its National Export Strategies on how resources are allocated by agency and aligned with the strategy's priorities. The TPCC secretariat agreed with our recommendations and stated it plans to take steps to address them.
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Ten states concentrated in the western, midwestern, and southeastern United States--all areas where the housing market had experienced strong growth in the prior decade--experienced 10 or more bank failures between 2008 and 2011 (see fig.1). Together, failures in these 10 states accounted for 72 percent (298), of the 414 bank failures across all states during this time period. Within these 10 states, 86 percent (257) of the failed banks were small institutions with assets of less than $1 billion at the time of failure, and 52 percent (155) had assets of less than $250 million. Twelve percent (36) were medium-size banks with more than $1 billion but less than $10 billion in assets, and 2 percent (5) were large banks with assets of more than $10 billion at the time of failure. In the 10 states with 10 or more failures between 2008 and 2011, failures of small and medium-size banks were largely associated with high concentrations of commercial real estate (CRE) loans, in particular the subset of acquisition, development, and construction (ADC) loans, and with inadequate management of the risks associated with these high concentrations. Our analysis of call report data found that CRE (including ADC) lending increased significantly in the years prior to the housing market downturn at the 258 small banks that failed between 2008 and 2011. This rapid growth of failed banks' CRE portfolios resulted in concentrations--that is, the ratio of total CRE loans to total risk-based capital--that exceeded regulatory thresholds for heightened scrutiny established in 2006 and increased the banks' exposure to the sustained downturn that began in 2007. Specifically, we found that CRE concentrations grew from 333 percent in December 2001 to 535 percent in June 2008. At the same time, ADC concentrations grew from 104 percent to 259 percent. The trends for the 36 failed medium-size banks were similar over this time period. In contrast, small and medium-sized banks that did not fail exhibited substantially lower levels and markedly slower growth rates of CRE loans and as a result had significantly lower concentrations of them, reducing the banks' exposure. With the onset of the financial crisis, the level of nonperforming loans began to rise, as did the level of subsequent net charge-offs, leading to a decline in net interest income and regulatory capital. The rising level of nonperforming loans, particularly ADC loans, appears to have been the key factor in the failures of small and medium-size banks in the 10 states between 2008 and 2011. For example, in December 2001, 2 percent of ADC loans at the small failed banks were classified as nonperforming. With the onset of the financial crisis, the level of nonperforming ADC loans increased quickly to 11 percent by June 2008 and 46 percent by June 2011. As banks began to designate nonperforming loans or portions of these loans as uncollectible, the level of net charge-offs also began to rise. In December 2001, net charge-offs of ADC loans at small failed banks were less than 1 percent. By June 2008, they had risen to 2 percent and by June 2011 to 12 percent. CRE and especially ADC concentrations in small and medium-size failed banks in the 10 states were often correlated with poor risk management and risky funding sources. Our analysis showed that small failed banks in the 10 states had often pursued aggressive growth strategies using nontraditional and riskier funding sources such as brokered deposits. The IG reviews noted that in the majority of failures, management exercised poor oversight of the risks associated with high CRE and ADC concentrations and engaged in weak underwriting and credit administration practices. Further, 28 percent (84) of the failed banks had been chartered for less than 10 years at the time of failure and appeared in many cases to have deviated from their approved business plans, according to FDIC. Large bank failures in the 10 states were associated with some of the same factors as small bank failures--high-risk growth strategies, weak underwriting and risk controls, and excessive concentrations that increased these banks' exposure to the real estate market downturn. The primary difference was that the large banks' strategies generally relied on risky nontraditional residential mortgage products as opposed to commercial real estate. To further investigate factors associated with bank failures across the United States, we analyzed data on FDIC-insured commercial banks and state-chartered savings banks from 2006 to 2011. Our econometric analysis suggests that across the country, riskier lending and funding sources were associated with an increased likelihood of bank failures. Specifically, we found that banks with high concentrations of ADC loans and an increased use of brokered deposits were more likely to fail from 2008 to 2011, while banks with better asset quality and greater capital adequacy were less likely to fail. An FDIC IG study issued in October 2012 found that some banks with high ADC concentrations were able to weather the recent financial crisis without experiencing a corresponding decline in their overall financial condition. Among other things, the IG found that these banks exhibited strong management, sound credit administration and underwriting practices, and adequate capital. We found that losses related to bank assets and liabilities that were subject to fair value accounting contributed little to bank failures overall, largely because most banks' assets and liabilities were not recorded at fair value. Based on our analysis, fair value losses related to certain types of mortgage-related investment securities contributed to some bank failures. But in general fair value-related losses contributed little to the decline in net interest income and regulatory capital that failed banks experienced overall once the financial crisis began. We analyzed the assets and liabilities on the balance sheets of failed banks nationwide that were subject to fair value accounting between 2007 and 2011. We found that generally more than two-thirds of the assets of all failed commercial banks (small, medium-size, and large) were classified as held-for-investment (HFI) loans, which were not subject to fair value accounting. For example, small failed commercial banks held an average of 77 percent of their assets as HFI loans in 2008. At the same time, small commercial banks that remained open held an average of 69 percent in such loans. Failed and open small thrifts, as well as medium-size and large commercial banks, had similar percentages. Investment securities classified as available for sale (AFS) represented the second-largest percentage of assets for all failed and open banks over the 5-year period we reviewed. For example, in 2008, small failed commercial banks held an average of 10 percent of their assets as AFS securities, while small open banks averaged 16 percent. Generally, AFS securities are recorded at fair value, but the changes in fair value impact earnings or regulatory capital only under certain circumstances. While several other asset and liability categories are recorded at fair value and impact regulatory capital, together these categories did not account for a significant percentage of total assets at either failed or open commercial banks or thrifts. For example, in 2008, trading assets, nontrading assets such as nontrading derivative contracts, and trading liabilities at small failed banks ranged from 0.00 to 0.03 percent of total assets. As discussed earlier, declines in regulatory capital at failed banks were driven by rising levels of credit losses related to nonperforming loans and charge-offs of these loans. For failed commercial banks and thrifts of all sizes nationwide, credit losses, which resulted from nonperforming HFI loans, were the largest contributors to the institutions' overall losses when compared to any other asset class. These losses had a greater negative impact on institutions' earnings and regulatory capital levels than those recorded at fair value. During the course of our work, several state regulators and community banking association officials told us that at some small failed banks, declining collateral values of impaired collateral-dependent loans-- particularly CRE and ADC loans in those areas where real estate assets prices declined severely--drove both credit losses and charge-offs and resulted in reductions to regulatory capital. A loan is considered "collateral dependent" when the repayment of the debt will be provided solely by the sale or operation of the underlying collateral, and there are no other available and reliable sources of repayment. Data are not publicly available to analyze the extent to which declines in the collateral values of impaired collateral-dependent CRE or ADC loans drove credit losses or charge-offs at the failed banks. However, state banking associations said that the magnitude of the losses was exacerbated by federal bank examiners' classification of collateral-dependent loans and evaluations of the appraisals banks used to support the impairment analyses of these loans. Federal banking regulators noted that regulatory guidance in 2009 directed examiners not to require banks to write down loans to an amount less than the loan balance solely because the value of the underlying collateral had declined. The regulators added that examiners were generally not expected to challenge the appraisals obtained by banks unless they found that any underlying facts or assumptions about the appraisal were inappropriate or could support alternative assumptions. The guidance also stated that in making decisions to write down loans, bank examiners were to first focus on the adequacy of cash flows to service the debt. If the sources of cash flows did not exist and the only likely repayment source was the sale of the collateral, then examiners were to direct the bank to write down the loan balances to the fair value of the collateral, less estimated costs to sell in certain circumstances. For example, one Federal Reserve official told us that some failed banks were extending ADC loans on an interest-only basis with no evidence that the borrower would be able to repay the principal and with underlying collateral whose value had declined by a very significant amount. In those cases, examiners questioned whether the banks would ever be repaid the principal owed. Under these circumstances, absent any evidence that the borrowers could pay through other means, the examiners would require a write-down. A loan loss provision is the money a bank sets aside to cover potential credit losses on loans. The Department of the Treasury (Treasury) and the Financial Stability Forum's Working Group on Loss Provisioning (Working Group) have observed that the current accounting model for estimating credit losses is based on historical loss rates, which were low in the years before the financial crisis. Under GAAP, the accounting model for estimating credit losses is commonly referred to as an "incurred loss model" because the timing and measurement of losses are based on estimates of losses incurred as of the balance sheet date. In a 2009 speech, the Comptroller of the Currency, who was a co-chair of the Working Group, noted that in a long period of benign economic conditions, such as the years prior to the most recent downturn, historical loan loss rates would typically be low. As a result, justifying significant loan loss provisioning to increase the loan loss allowance can be difficult under the incurred loss model. Treasury and the Working Group noted that earlier recognition of loan losses could have reduced the need for banks to recognize increases in their incurred credit losses through a sudden series of loan loss provisions that reduced earnings and regulatory capital. Federal banking regulators have also noted that requiring management at the failed banks to recognize loan losses earlier could have helped stem losses. Specifically, such a requirement might have provided an incentive not to concentrate so heavily in the loans that later resulted in significant losses. To address this issue, the Financial Accounting Standards Board has issued a proposal for public comment for a loan loss provisioning model that is more forward-looking and focuses on expected losses. This proposal would allow banks to establish a means of recognizing potential losses earlier on the loans they underwrite and could incentivize prudent risk management practices. Moreover, the proposal is designed to help address the cycle of losses and failures that emerged in the recent crisis as banks were forced to increase loan loss allowances and raise capital when they were least able to do so (procyclicality). We plan to continue to monitor the progress of the ongoing activities of the standard setters to address concerns with the loan loss provisioning model. FDIC is required to resolve a bank failure in a manner that results in the least cost to the Deposit Insurance Fund (DIF). FDIC's preferred resolution method is to sell the failed bank to another, healthier, bank. During the most recent financial crisis, FDIC facilitated these sales by including a loss share agreement, under which FDIC absorbed a portion of the loss on specified assets purchased by the acquiring bank. From January 2008 through December 31, 2011, FDIC was appointed as receiver for the 414 failed banks, with $662 billion in book value of failed bank assets. FDIC used purchase and assumption agreements (the direct sale of a failed bank to another, healthier bank) to resolve 394 failed institutions with approximately $652 billion in assets. As such, during the period 2008 through 2011, FDIC sold 98 percent of failed bank assets using purchase and assumption agreements. However, FDIC only was able to resolve so many of these banks with purchase and assumption agreements because it offered to share in the losses incurred by the acquiring institution. FDIC officials said that at the height of the financial crisis in 2008, FDIC sought bids for whole bank purchase and assumption agreements (in which the acquiring bank assumes essentially all of the failed bank's assets and liabilities) with little success. Potential acquiring banks we interviewed told us that they did not have sufficient capital to take on the additional risks that the failed institutions' assets represented. Acquiring bank officials that we spoke to said that they would not have purchased the failed banks without FDIC's shared loss agreements because of uncertainties in the market and the value of the assets. Because shared loss agreements had worked well during the savings and loan crisis of the 1980s and early 1990s, FDIC decided to offer the option of having such agreements as part of the purchase and assumption of the failed bank. Shared loss agreements provide potential buyers with some protection on the purchase of failed bank assets, reduce immediate cash needs, keep assets in the private sector, and minimize disruptions to banking customers. Under the agreements, FDIC generally agrees to pay 80 percent for covered losses, and the acquiring bank covers the remaining 20 percent. From 2008 to the end of 2011, FDIC resolved 281of the 414 failures (68 percent) by providing a shared loss agreement as part of the purchase and assumption. The need to offer shared loss agreements diminished as the market improved. For example, in 2012 FDIC was able to resolve more than half of all failed institutions without having to offer to share in the losses. Specifically, between January and September 30, 2012, FDIC had agreed to share losses on 18 of 43 bank failures (42 percent). Additionally, some potential bidders were willing to accept shared loss agreements with lower than 80-percent coverage. As of December 31, 2011, DIF receiverships had made shared loss payments totaling $16.2 billion. In addition, future payments under DIF receiverships are estimated at an additional $26.6 billion over the duration of the shared loss agreements, resulting in total estimated lifetime losses of $42.8 billion (see fig. 2). By comparing the estimated cost of the shared loss agreements with the estimated cost of directly liquidating the failed banks' assets, FDIC has estimated that using shared loss agreements has saved the DIF over $40 billion. However, while the total estimated lifetime losses of the shared loss agreements may not change, the timing of the losses may, and payments from shared loss agreements may increase as the terms of the agreements mature. FDIC officials stated that the acquiring banks were being monitored for compliance with the terms and conditions of the shared loss agreements. FDIC is in the process of issuing guidance to the acquiring banks reminding them of these terms to prevent increased shared loss payments as these agreements approach maturity. The acquisitions of failed banks by healthy banks appear to have mitigated the potentially negative effects of bank failures on communities, although the focus of local lending and philanthropy may have shifted. First, bank failures and failed bank acquisitions can have an impact on market concentration--an indicator of the extent to which banks in the market can exercise market power, by, for example, raising prices or reducing the availability of some products and services. But, we found that a limited number of metropolitan areas and rural counties were likely to have become significantly more concentrated. We analyzed the impact of bank failures and failed bank acquisitions on local credit markets using data for the period from June 2007 to June 2012. We calculated the Herfindahl-Hirschman Index (HHI), a key statistical measure used to assess market concentration and the potential for firms to exercise their ability to influence market prices. The HHI is measured on a scale of 0 to 10,000, with values over 1,500 considered indicative of concentration. Our results suggest that a small number of the markets affected by bank failures and failed bank acquisitions were likely to have become significantly more concentrated. For example, 8 of the 188 metropolitan areas affected by bank failures and failed bank acquisitions between June 30, 2009, and June 29, 2010, met the criteria that indicate significant competitive concerns. Similarly, 5 of the 68 rural counties affected by bank failures during the same time period met the criteria. The relatively limited number of areas where concentration increased was generally the result of acquisitions by institutions that were not already established in the locales that the failed banks served. However, the effects could be potentially significant for those limited areas that had been serviced by one bank or where only a few banks remain. Second, our econometric analysis of call report data from 2006 through 2011 found that failing small banks extended progressively less net credit as they approached failure, but that acquiring banks generally increased net credit after the acquisition, albeit more slowly. Officials from acquiring and peer banks we interviewed in Georgia, Michigan, and Nevada agreed. However, general credit conditions were generally tighter in the period following the financial crisis. For example, several bank officials noted that in the wake of the bank failures, underwriting standards had tightened, making it harder for some borrowers who might have been able to obtain loans prior to the bank failures to obtain them afterward. Several banks officials we interviewed also said that new lending for certain types of loans could be restricted in certain areas. For example, they noted that the CRE market, and in particular the ADC market, had contracted and that new lending in this area had declined significantly. Officials from regulators, banking associations, and banks we spoke with also said that involvement in local philanthropy had declined as small banks approached failure but generally increased after acquisition. State banking regulators and national and state community banking associations we interviewed told us that community banks tended to be highly involved in local philanthropic activities before the recession--for example, by designating portions of their earnings for community development or other charitable activities. However, these philanthropic activities decreased as the banks approached failure and struggled to conserve capital. Acquiring bank officials we interviewed told us that they had generally increased philanthropic activities compared with the failed community banks during the economic downturn and in the months before failure. However, acquiring banks may or may not focus on the same philanthropic activities as the failed banks. For example, one large acquiring bank official told us that the acquiring bank made major charitable contributions to large national or statewide philanthropic organizations and causes and focused less on the local community charities to which the failed bank had contributed. Finally, we econometrically analyzed the relationships among bank failures, income, unemployment, and real estate prices for all states and the District of Columbia (states) for 1994 through 2011. Our analysis showed that bank failures in a state were more likely to affect its real estate sector than its labor market or broader economy. In particular, this analysis did not suggest that bank failures in a state--as measured by failed banks' share of deposits--were associated with a decline in personal income in that state. To the extent that there is a relationship between the unemployment rate and bank failures, the unemployment rate appears to have more bearing on failed banks' share of deposits than vice versa. In contrast, our analysis found that failed banks' share of deposits and the house price index in a state appear to be significantly related to each other. Altogether, these results suggest that the impact of bank failures on a state's economy is most likely to appear in the real estate sector and less likely to appear in the overall labor market or in the broader economy. However, we note that these results could be different at the city or county level. Chairman Johnson, Ranking Member Crapo, and Members of the Committee, this concludes my prepared statement. I would be happy to answer any questions that you may have at this time. If you or your staff have any questions about this testimony, please contact Lawrance Evans, Jr. at (202) 512-4802 or [email protected]. Contact points for our Offices of Public Affairs and Congressional Relations may be found on the last page of this report. GAO staff who made key contributions to this testimony include Karen Tremba, Assistant Director; William Cordrey, Assistant Director; Gary Chupka, Assistant Director; William Chatlos; Emily Chalmers, Robert Dacey; Rachel DeMarcus; M'Baye Diagne; Courtney LaFountain; Marc Molino, Patricia Moye; Lauren Nunnally; Angela Pun, Stefanie Jonkman; Akiko Ohnuma; Michael Osman; and Jay Thomas. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Between January 2008 and December 2011--a period of economic downturn in the United States--414 insured U.S. banks failed. Of these, 85 percent (353) were small institutions with less than $1 billion in assets. Small banks often specialize in small business lending and are associated with local community development and philanthropy. The failures of these banks have raised questions about contributing factors. Further, the failures have raised concerns about the accounting and regulatory requirements needed to maintain reserves large enough to absorb expected loan losses (loan loss allowances)--for example, when borrowers are unable to repay a loan (credit losses). This statement is based on findings from GAO's 2013 report on recent bank failures ( GAO-13-71 ) required by Pub. L. No 112-88. This testimony discusses (1) the factors that contributed to the bank failures in states with the most failed institutions between 2008 and 2011; (2) the use of shared loss agreements in resolving troubled banks; and (3) the effect of recent bank failures on local communities. To do this work, GAO relied on issued report GAO-13-71 and updated data as appropriate. Ten states concentrated in the western, midwestern, and southeastern United States--areas where the housing market had experienced strong growth in the prior decade--each experienced 10 or more commercial bank or thrift (bank) failures between 2008 and 2011. The failures of small banks (those with less than $1 billion in assets) in these states were largely driven by credit losses on commercial real estate (CRE) loans, particularly loans secured by real estate to finance land development and construction. Many of the failed banks had often pursued aggressive growth strategies using nontraditional, riskier funding sources and exhibited weak underwriting and credit administration practices. The Department of the Treasury and the Financial Stability Forum's Working Group on Loss Provisioning observed that earlier recognition of credit losses could have potentially lessened the impact of the crisis. The accounting model used for estimating credit losses is based on historical loss rates, which were low in the prefinancial crisis years. In part due to these accounting rules, loan loss allowances were not adequate to absorb the wave of credit losses that occurred once the financial crisis began. Banks had to recognize these losses through a sudden series of increases (provisions) to the loan loss allowance that reduced earnings and regulatory capital. In December 2012, the Financial Accounting Standards Board issued a proposal for public comment for a loan loss provisioning model that is more forward looking and would incorporate a broader range of credit information. This would result in banks establishing earlier recognition of loan losses for the loans they underwrite and could incentivize prudent risk management practices. It should also help address the cycle of losses and failures that emerged in the recent crisis as banks were forced to increase loan loss allowances and raise capital when they were least able to do so. The Federal Deposit Insurance Corporation (FDIC) used shared loss agreements to help resolve 281 of the 414 bank failures during the recent financial crisis to minimize the impact on the Deposit Insurance Fund (DIF). Under a shared loss agreement, FDIC absorbs a portion of the loss on specified assets of a failed bank that are purchased by an acquiring bank. FDIC officials, state bank regulators, community banking associations, and acquiring banks of failed institutions GAO interviewed said that shared loss agreements helped to attract potential bidders for failed banks during the financial crisis. FDIC compared the estimated cost of the shared loss agreements to the estimated cost of directly liquidating the failed banks' assets and estimated that the use of shared loss agreements saved the DIF over $40 billion. GAO analysis of metropolitan and rural areas where bank failures occurred and econometric analysis of bank income and condition data suggested that the acquisitions of failed banks by healthy banks mitigated the potentially negative effects of failures on communities. However, the focus of local lending and philanthropy may have shifted. Also, bank officials whom GAO interviewed noted that in the wake of the bank failures, underwriting standards had tightened. As a result, credit was generally most available for small business owners with good credit histories and strong financials. Further, the effects of bank failures could potentially be significant for communities that had been serviced by only one bank or where only a few banks remain.
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The size and nature of the Medicare program make HCFA unique in authority and responsibility among health care payers. Fee-for-service Medicare serves about 33 million beneficiaries and processes a high volume of claims--an estimated 900 million in fiscal year 1997--from hundreds of thousands of providers, such as physicians, hospitals, skilled nursing facilities, home health agencies, and medical equipment suppliers. HCFA is also responsible for paying and monitoring more than 400 managed care health plans that serve more than 5 million beneficiaries. Enrollment in these plans has been growing by about 85,000 beneficiaries monthly. The Medicare statute divides benefits into two parts: (1) "hospital insurance," or part A, which covers inpatient hospital, skilled nursing facility, hospice, and certain home health care services, and (2) "supplementary medical insurance," or part B, which covers physician and outpatient hospital services, diagnostic tests, and ambulance and other medical services and supplies. In fiscal year 1997, part A covered an estimated 39 million aged and disabled beneficiaries, while a slightly smaller number were covered by part B, which requires payment of a monthly premium. currently consists mostly of risk contract health maintenance organizations (HMO). Medicare pays these HMOs a monthly amount, fixed in advance, for all the services provided to each beneficiary enrolled. HCFA, an agency within HHS, has slightly less than 4,000 full-time employees, 65 percent of whom work in the agency's headquarters offices; the rest work in the agency's 10 regional offices across the country. In addition to the agency's workforce, HCFA oversees more than 60 claims processing contractors that are insurance companies--like Blue Cross and Blue Shield plans, Mutual of Omaha, and CIGNA. In fiscal year 1997, the contractors employed an estimated 22,200 people to perform Medicare claims processing and review functions. Two recent acts grant HCFA substantial authority and responsibility to reform Medicare. The Health Insurance Portability and Accountability Act of 1996 (HIPAA), P.L. 104-191, provides the opportunity to enhance Medicare's anti-fraud-and-abuse activities. The Balanced Budget Act of 1997 (BBA), P.L. 105-33, introduces new health plan options and major payment reforms. In correspondence to this Subcommittee last October, we noted that these two pieces of legislation addressed in large measure our concerns and those of the HHS Inspector General regarding the tools needed to combat fraud and abuse. They also address many of the weaknesses discussed in our High-Risk Series report on Medicare. network to perform payment safeguard functions while avoiding conflicts of interest. HIPAA also adds new civil and criminal penalties to heretofore little-used enforcement powers. BBA provides for a dramatic expansion of health plan choices available to Medicare beneficiaries and makes reforms to payment methods in traditional fee-for-service Medicare and managed care. Under the act's new Medicare+Choice program, beneficiaries will have new health plan options, including preferred provider organizations (PPO), provider sponsored organizations (PSO), and private fee-for-service plans. Medicare+Choice introduces new consumer information and protection provisions, including a requirement to disseminate comparative information on Medicare+Choice plans in beneficiaries' communities and a requirement that all Medicare+Choice plans obtain external review from an independent quality assurance organization. These provisions address problems we have worked to correct with this committee and others in the Congress. BBA also provided for revamping many of Medicare's decades-old payment systems to contain the unbridled growth in certain program components. Specifically, the act mandated prospective payment systems for services provided by about 1,100 inpatient rehabilitation facilities, 14,000 skilled nursing facilities, 5,000 hospital outpatient departments, and 8,900 home health agencies. In addition, it made changes to the payment methods for hospitals, including payments for direct and indirect medical education costs. It also adjusted fee schedule payments for physicians and durable medical equipment and authorized the conversion of the remaining reasonable charge payment systems to fee schedules. Finally, the act granted the authority to conduct demonstrations on the cost-effectiveness of purchasing items and services through competitive bids from suppliers and providers. While legislative reforms are dramatically reshaping Medicare, other changes are occurring, thus compounding difficult management challenges. For example, HCFA is rethinking its strategy to develop, modernize, or otherwise improve the agency's multiple automated claims processing and other information systems. This will involve preparing systems for the year 2000, repairing the deteriorating managed care enrollment systems, and making the necessary modifications to existing systems. HCFA plans to make these changes as an interim measure until, consistent with the Information Technology Management Reform Act of 1996 (P.L. 104-106), comprehensive reengineering can take place, such as making claims processing systems and payment mechanisms more efficient, programming BBA payment changes, and modernizing the anti-fraud-and-abuse system software. HCFA is also confronting transition problems resulting from the recent loss of large-volume claims processing contractors and the need for remaining contractors to absorb the workload. Finally, HCFA recently restructured its organizational units to better focus on its mission and is experiencing the kind of disruptions common to organizational transitions. Against this backdrop, the themes that emerged from our individual interviews and focus groups with HCFA managers centered on (1) distribution of agency resources, (2) need for specialized expertise, (3) loss of institutional experience, and (4) reorganization issues. "Robbing Peter to pay Paul" was the expression used to characterize one of the major themes from our focus groups. Specifically, managers were concerned that because of the concentrated efforts to implement BBA and solve computer problems that could arise in the year 2000, the quality of other work might be compromised or tasks might be neglected altogether. However, managers also noted that whereas some BBA-related tasks are completely new--such as conducting an open enrollment period for Medicare+Choice plans--and therefore add to the workload, others merely formalize work that was already underway but impose deadlines for completion, such as developing prospective payment methods for reimbursing several types of health care providers. staff members dedicated to contractor oversight currently has two; the others, they said, had been reassigned to work on managed care issues. This concerns us in light of our work on Medicare program management. Over the past several years, we have reported that HCFA has not adequately ensured that contractors are paying only medically necessary or otherwise appropriate claims. Similarly, the HHS Inspector General's fiscal year 1996 financial audit found contractor oversight weaknesses. For example, some contractors selected for audit could not readily verify total Medicare expenditures, including paid claim amounts, to ensure that amounts were accurate, supported, and properly classified; did not adequately document accounts receivable; and did not have adequate internal controls over the receipt and disbursement of cash. Further, HCFA does not have a method for estimating the amount of improper Medicare payments; for fiscal year 1996, the Inspector General estimated that HCFA made about $23 billion in inappropriate payments. Managers also expressed a common concern about the staff's mix and level of skills. They noted that HCFA's traditional approach of hiring generalist staff and training them largely on the job is no longer well suited to the agency's need to implement recent reforms expeditiously. Instead, managers are beginning to identify the need for staff with specialized technical expertise, such as computer system analysts, survey statisticians, data analysts, market researchers, information management specialists, managed care experts, and health educators. In our discussions, several managers placed "appropriate skill sets" at the top of their wish lists. As an illustration, the Medicare+Choice program introduces new health plan types and requires the dissemination of information about the plans to beneficiaries in 1998. Called the Medicare+Choice Information Fair, this nationwide educational and publicity campaign will be the first effort of its kind for HCFA. Managers were concerned that staff without prior experience will need to pull together information that describes and evaluates the merits of various plans. data systems. They also cited the need for specialists in contracting, facilities management, and telecommunications. Many senior and midlevel managers and experienced technical staff have retired in recent years or are eligible to retire soon. Almost 40 percent of the organization has turned over in the past 5 years. Many were said to have spent their entire careers focused on a particular aspect of the Medicare program. A common concern in our discussions was the erosion of experienced staff to perform a variety of tasks, such as writing regulations and developing payment systems. Managers cited the loss of experienced staff as a problem for developing and implementing the various prospective payment systems mandated by BBA. They also noted that developing one new payment system would have been manageable, but losses of expert staff make it difficult to implement multiple new payment systems concurrently. For example, experienced staff are needed to perform such technical tasks as those we mentioned in our October statement before this Subcommittee, including collecting reliable cost and utilization data to compute the new prospective payment rates, developing case mix adjusters, auditing cost reports to avoid incorporating inflated costs into the base rates, and monitoring to guard against providers' skimping on services to increase profits. Our focus group participants emphasized that it will be difficult to replace its experienced staff in the short term. Although HCFA is planning to hire new people, the time typically needed for recruiting, hiring, and orienting new employees is considerable. Managers commented that new employees, although highly educated and motivated, sometimes need extensive on-the-job training to replace lost expertise. In July 1997, HCFA restructured its entire organization. The new design reflected the agency's intent to, among other things, (1) combine activities to redirect additional resources to the growing managed care side of the program, (2) acknowledge a shift from HCFA's traditional role as claims payer to a more active role as purchaser of health care services, and (3) establish three components focused on beneficiaries, health plans and providers, and Medicaid and other activities conducted at the state level. It also established technical and support offices to assist these components. (See HCFA's organization chart in app. I.) In announcing the planned reorganization, the Administrator explained that as Medicare has evolved over the years, new programs and projects were layered onto existing structures. Over time, he noted, this became cumbersome and confusing. Many managers we spoke with considered the reorganization to be theoretically sound. Some also told us that it was long overdue, because HCFA's structure encouraged work on narrow issues within self-contained groups--an approach that did not benefit from the expertise existing across the agency. However, a consensus of focus group participants and high-level officials believed that the timing of the reorganization's implementation is unfortunate. They explained that they are currently facing full agendas with tight deadlines, which add to the stresses associated with any organizational change. Managers described their difficulties in establishing new communication and coordination links within units as well as across the agency. For some, new efforts to coordinate have proved time-consuming to the point of being counterproductive. Managers commented that sign-off sheets formalizing coordination have enough names to take on the appearance of a staff roster. They noted that the situation was particularly acute in light of the fact that people have not yet moved to the actual location of their new units. Managers in one division said staff were scattered in as many as seven places around HCFA's building. HCFA now hopes to have staff relocated by late spring, although this plan appears to be optimistic. We observed that managers appeared to be clear on top management's expectations for completing BBA-related activities and for making sure that contractors' claims processing systems would comply with the millennium changes. They were less certain, however, about the agency's strategy for meeting other mission-related work. of its workload that would enable the agency's senior decisionmakers to consider whether resources are, in fact, adequate or properly distributed and which activities could be at risk of being neglected. One example that came to our attention concerned the legislative mandates for reporting to the Congress on specific activities and programs. Currently, neither top management nor the Office of Legislation compiles a list of reports due and their deadlines. Unit managers are concerned because, although they are aware that certain reports for which they are responsible will be late, there is no systematic way to keep top management informed. Top management, in turn, cannot decide to heighten the priority for a particular report or develop a strategy to mitigate the consequences of others being late. The illustration above and our discussions with agency officials suggest that while HCFA may be ready to assert its BBA-related resource needs, it is not likely to be in a position to adequately justify the resources it seeks to carry out its other Medicare program objectives. This observation calls to mind our July 1997 report on the adequacy of HHS's draft strategic plan under the Government Performance and Results Act. We noted that the plan failed to address certain major management challenges, including Medicare-related problems. Specifically, the plan did not address long-standing concerns about Medicare's existing claims processing systems or HCFA's efforts to acquire a billion-dollar integrated database system. In addition, it did not address the issue of information security that was identified in the fiscal year 1996 financial statement audit of HCFA, specifying that systems weaknesses created the risk of unauthorized access to sensitive medical history and claims data. HCFA is an agency facing many challenges. Even before BBA made major changes, Medicare was a vast and complex program. Volumes of reports by us and others demonstrate, in numerous areas, HCFA's need to address program vulnerabilities. Because of the risks associated with a program of Medicare's magnitude, the need for HCFA to be vigilant cannot be overstated. struggling to carry out Medicare's numerous and challenging activities. In addition, they assert that the loss of experienced staff has further diminished HCFA's capacity. Nevertheless, senior managers do not appear to be adequately informed about the status of the full range of Medicare activities or associated resource needs. Under these circumstances, HCFA seems to be focusing most of its energy on important deadlines and pressures, but other critical functions may be receiving back-burner attention. We have work underway to assess the status of HCFA's efforts to implement aspects of HIPAA and BBA and modernize the agency's information systems. We will also continue to monitor the progress of HCFA's reorganization efforts. Mr. Chairman, this concludes my statement. I will be happy to answer your questions. Medicare: Effective Implementation of New Legislation Is Key to Reducing Fraud and Abuse (GAO/HEHS-98-59R, Dec. 3, 1997). Medicare Fraud and Abuse: Summary and Analysis of Reforms in the Health Insurance Portability and Accountability Act of 1996 and the Balanced Budget Act of 1997 (GAO/HEHS-98-18R, Oct. 9, 1997) and related testimony entitled Recent Legislation to Minimize Fraud and Abuse Requires Effective Implementation (GAO/T-HEHS-98-9, Oct. 9, 1997). Medicare Automated Systems: Weaknesses in Managing Information Technology Hinder Fight Against Fraud and Abuse (GAO/T-AIMD-97-176, Sept. 29, 1997). Medicare Home Health Agencies: Certification Process Is Ineffective in Excluding Problem Agencies (GAO/T-HEHS-97-180, July 28, 1997). Medicare: Need to Hold Home Health Agencies More Accountable for Inappropriate Billings (GAO/HEHS-97-108, June 13, 1997). Medicare Managed Care: HMO Rates, Other Factors Create Uneven Availability of Benefits (GAO/HEHS-97-133, May 19, 1997). Medicare (GAO/HR-97-10) and related testimony entitled Medicare: Inherent Program Risks and Management Challenges Require Continued Federal Attention (GAO/T-HEHS-97-89, Mar. 4, 1997). Medicare: HCFA Should Release Data to Aid Consumers, Prompt Better HMO Performance (GAO/HEHS-97-23, Oct. 22, 1996). Medicare: Millions Can Be Saved by Screening Claims for Overused Services (GAO/HEHS-96-49, Jan. 30, 1996). Medicare: Excessive Payments for Medical Supplies Continue Despite Improvements (GAO/HEHS-95-171, Aug. 8, 1995). Medicare: Increased HMO Oversight Could Improve Quality and Access to Care (GAO/HEHS-95-155, Aug. 3, 1995). Medicare: Inadequate Review of Claims Payments Limits Ability to Control Spending (GAO/HEHS-94-42, Apr. 28, 1994). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO discussed the Health Care Financing Administration's (HCFA) ability to meet growing program management challenges, focusing on: (1) HCFA's new authorities under recent Medicare legislation; (2) HCFA managers' views on the agency's capacity to carry out various Medicare-related functions; and (3) the actions HCFA needs to take to accomplish its objectives over the next several years. GAO noted that: (1) substantial program growth and greater responsibilities appear to be outstripping HCFA's capacity to manage its existing workload; (2) legislative reforms have increased HCFA's authority to manage the Medicare program; (3) simultaneously, however, other factors have increased the challenges HCFA faces, including the need to make year 2000 computer adjustments and develop a new, comprehensive information management strategy; manage transitions in its network of claims processing contractors; and implement a major agency reorganization; (4) in addition, officials report that the expertise to carry out HCFA's new functions is not yet in place and that HCFA has experienced a loss of institutional knowledge through attrition; (5) in this environment, agency managers are concerned that some of their responsibilities might be compromised or neglected altogether because of higher-priority work; (6) HCFA's approach for dealing with its considerable workload is incomplete; (7) heretofore, the agency lacked an approach--consistent with the requirement of the Government Performance and Results Act of 1993 to develop a strategic plan--that specified the full range of program objectives to be accomplished; (8) HCFA has developed a schedule for responding to recent legislative reforms but is still in the process of detailing the staffing and skill levels required to meet reform implementation deadlines; and (9) while addressing new mandates, the agency also needs to specify how it will continue to carry out its ongoing critical functions.
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The Social Security Act of 1935 authorized the SSA to establish a record- keeping system to help manage the Social Security program and resulted in the creation of the SSN. SSA uses the SSN as a means to track workers' earnings and eligibility for Social Security benefits. Through a process known as enumeration, each eligible person receives a unique number, which SSA uses for recording workers' employment history and Social Security benefits. SSNs are routinely issued to U.S. citizens, and they are also available to noncitizens lawfully admitted to the United States with permission to work. Lawfully admitted noncitizens who lack DHS work authorization may qualify for an SSN for nonwork purposes when a federal, state, or local law requires that they have an SSN to obtain a particular welfare benefit or service. In this case, the Social Security card notes that the SSN is "Not Valid for Employment." As of 2003, SSA had assigned slightly more than 7 million nonwork SSNs. Over the years, SSA has tightened the requirements for assigning nonwork SSNs. In 1986, Congress passed the Immigration Reform and Control Act (IRCA), which made it illegal for individuals and entities to knowingly hire and continue to employ unauthorized workers. The act established a two- pronged approach for helping to limit the employment of unauthorized workers: (1) an employment verification process through which employers are to verify newly hired workers' employment eligibility and (2) a sanctions program for fining employers who do not comply with the act. Under the employment verification process, workers and employers must complete the Employment Eligibility Verification Form (Form I-9) to certify that the workers are authorized to work in the United States. Those employers who do not follow the verification process can be sanctioned. SSA has two types of data useful to identifying unauthorized work-- individual Social Security records and earnings reports. Its individual records, which include name, date of birth, and SSN, among other things, can be used to verify that a worker is providing the SSN that was assigned to a person of that name. These records are used in verification services that are available free of charge to employers on a voluntary basis. SSA's earnings reports could also be used to identify some unauthorized work by reporting noncitizens who may have worked without authorization and employers who have a history of providing SSN/name combinations that do not match SSA records. SSA uses individual Social Security records in its Employee Verification Service (EVS) and the Web-based SSN Verification Service (SSNVS), which employers can use to assure themselves that the names and SSNs of their workers match SSA's records. The services, designed to ensure accurate employer wage reporting, are offered free of charge. Employer use is voluntary. Although these systems only confirm whether submitted names and SSNs match, they could help employers identify workers who provide an SSN with fictitious information. Over the years, SSA has developed several different verification methods under EVS. For example, employers may submit lists of workers' names and SSNs by mail on a variety of media, such as magnetic tapes or diskettes. Alternatively, employers may call a toll-free number or present a hard-copy list via fax, mail, or hand delivery to a local SSA office. SSA verifies the information received from employers by comparing it with information in its own records. SSA then advises the employer whether worker names and SSNs match. EVS offers the benefit of verifying name and SSN combinations for a company's entire payroll. However, the system would not be able to detect a worker's misuse of another person's name and SSN as long as the name and SSN matched. Employers do not widely use this service. In an attempt to make verification more attractive to employers, in 2005, SSA implemented the Web-based SSNVS. It is designed to respond to employer requests within 24 hours. Requests of up to 10 worker names and SSNs can be verified instantaneously. Larger requests of up to 250,000 names can be submitted in a batch file, and SSA will provide results by the next business day. While this new system is attracting more employer interest, it is still not widely used. SSA also uses its records in a work eligibility verification system developed by DHS called the Basic Pilot, which offers electronic verification of work authorization for newly hired workers. Use of this program by employers is also voluntary, and the service has been available nationwide only since December 2004. Employers who agree to participate must electronically verify the status of all newly hired workers within 3 days of hire, using information that a new hire is required to provide. Under this program, an employer electronically sends worker data through DHS to SSA to check the validity of the SSN, name, date of birth, and citizenship provided by the worker. SSA records are used to confirm information on citizens. For noncitizens, SSA confirms SSN, name, and date of birth, then refers the request to DHS to verify work authorization status against DHS's automated records. If DHS cannot verify work authorization status for the submitted name and SSN electronically, the query is referred to a DHS field office for additional research by immigration status verifiers. If SSA is unable to verify the SSN, name, and date of birth or DHS record searches cannot verify work authorization, a tentative nonconfirmation response is transmitted to the employer. After checking the accuracy of the information and resubmitting the information, if necessary, the employer must advise the worker of the finding and refer him or her to either DHS or SSA to correct the problem. During this time, employers are not to take any adverse actions against those workers related to verification, such as limiting their work assignments or pay. When workers do not contest their tentative nonconfirmations within the allotted time, the Basic Pilot program issues a final nonconfirmation. Employers are required to either immediately terminate employment or notify DHS of their continued employment. Like SSA's verification services, the Basic Pilot is voluntary and is not widely utilized. As of January 2006, about 5,500 businesses nationwide had registered to participate, although a significantly smaller number of these are active users. Active participants have made about 4.7 million initial verification requests over a 5-year period (981,000 requests were made in fiscal year 2005). DHS reported on actions taken to address weaknesses in the program that had been identified during the early years of the program. They included delays in updating immigration records, erroneous nonconfirmations, and program software that was not user friendly. We subsequently reported on additional challenges, specifically, the capacity constraints of the system, its inability to detect identity fraud, and the fact that the program is limited to verifying work authorization of newly hired workers. SSA's earnings records can also provide information on unauthorized work. There are two sets of data that are relevant to unauthorized work. The first set, the Nonwork Alien File, contains earnings reports for SSNs that were issued for nonwork purposes. The second set, the Earnings Suspense File, contains earnings reports in which the name and SSN do not match. Both could help identify some unauthorized work. SSA is required by law to provide its Nonwork Alien File to DHS since it suggests a group of people who are in the United States legally but may be working without authorization. Since 1998, SSA has provided DHS annual data on over half a million persons with earnings listed under nonwork SSNs. The file includes annual earnings amounts, worker names and addresses, and employer names and addresses as well. DHS has found this file to be of little use to enforcement activities, however. According to DHS officials, the file is currently not an effective tool for worksite enforcement due in part to inaccuracies in the data and the absence of some information that would help the department efficiently target its enforcement. In fact, because SSA only updates work authorization status at the request of the SSN holder, individuals in the file may now be U.S. citizens or otherwise legal workers who simply have not updated their status with SSA. Our ongoing work in this area suggests that a number of these records are indeed associated with people who later obtained permission to work from DHS. SSA policy is to update work authorization status when the SSN holder informs the agency of the status change and provides supporting documentation. Unless the individual informs SSA directly of the status change, SSA's enumeration records will continue to show the person as unauthorized to work and will record his or her earnings to the Nonwork Alien File. Currently, the extent to which such noncitizens are included in the file is unknown, but SSA and DHS officials have both acknowledged that the file may include a number of people who are currently authorized to work. DHS officials said that the file would be of greater value if it contained DHS's identifying numbers--referred to as alien registration numbers. According to DHS officials, because persons in the file do not have an identifier in common use by both agencies, they cannot automatically be matched with DHS records. As a result, DHS officials told us that they use names and birth dates to match the records, which can result in mismatches because names can change and numbers in birth dates may be transposed. SSA officials have said that generally they do not collect alien registration numbers from noncitizens. Collecting the alien registration number and providing it in the Nonwork Alien File is possible, they stated, but would require modifications to SSA's information systems and procedures. They also noted that SSA would only be able to collect the alien registration number when noncitizens are assigned an SSN or when such an individual updates his or her record. As part of its procedures, SSA is required to verify the immigration status of noncitizens before assigning them an SSN, which requires using alien registration numbers. However, some noncitizens, such as those who have temporary visas, (e.g. students) may not have an alien registration number. In these cases, SSA would not be able to include the number in the Nonwork Alien File. The time it takes SSA to validate earnings reports and convey the Nonwork Alien File to DHS also makes the file less effective for worksite enforcement. When SSA finishes its various processes to ensure that the file includes the appropriate data, the reported earnings can be up to 2 years old. By that time, many of the noncitizens included in the file may have changed employers, relocated, or changed their immigration status, resulting in out-of-date data on individuals or ineffective leads for DHS agents. A DHS official told us that if the Nonwork Alien File were to contain industry codes for the reporting employers, DHS could target those in industries considered critical for homeland security purposes, which would be consistent with DHS's mission and enforcement priorities. Having information about the industries the employers are in would help them better link the data to areas of high enforcement priority, such as airports, power plants, and military bases. Another SSA earnings file, referred to as the Earnings Suspense File, contains earnings reports in which the name and SSN do not match SSA's records, suggesting employer or worker error or, potentially, identity theft and unauthorized work. We have reported that this file, which contained 246 million records as of November 2004, appears to include an increasing number of records associated with unauthorized work. SSA's Office of the Inspector General has used the ESF to identify employers who have a history of providing names and SSNs that do not match. When SSA encounters earnings reports with names and SSNs that do not match, it makes various attempts to correct them using over twenty automated processes. However, about 4 percent of all earnings reports still remain unmatched and are electronically placed in the ESF, where SSA uses additional automated and manual processes to continue to identify valid records. Forty-three percent of employers associated with earnings reports in the ESF are from only 5 of the 83 broad industry categories, with eating and drinking establishments and construction being the top categories. A small portion of employers also account for a disproportionate number of ESF reports. For example, only about 8,900 employers--0.2 percent of all employers with reports recorded in the ESF for tax years 1985-2000--submitted over 30 percent of the reports we analyzed. Our past work has documented that individuals who worked prior to obtaining work authorization are a growing source of the unmatched earnings reports in the ESF that are later reinstated to a worker's account. Once workers obtain a valid SSN, they can provide SSA evidence of prior earnings reports representing unauthorized employment prior to receiving their SSN. Such earnings reports can then be used to determine a worker's eligibility for benefits. DHS officials believe that the ESF could be useful for targeting its limited worksite enforcement resources. For example, they could use the ESF to identify employers who provide large numbers of invalid SSNs or names and SSNs that do not match. They told us that these employers may knowingly hire unauthorized workers with no SSN or fraudulent SSNs and that employers who are knowingly reporting incorrect information about their workers might also be involved in illegal activities involving unauthorized workers. However, it is not clear that the ESF, which is much larger than the Nonwork Alien File, would be manageable or allow for targeted enforcement. The ESF contains hundreds of millions of records, many unrelated to unauthorized work, making it difficult to use for targeting limited resources. While the ESF may help identify some of the most egregious employers of unauthorized workers, in terms of poor earnings reporting, its focus is not on unauthorized workers. Our work has shown that most of the reinstatements from the file belong to U.S.-born citizens, not to unauthorized workers. In addition, because the ESF contains privileged taxpayer data, SSA cannot share this information with DHS without specific legislative authorization. SSA's Office of the Inspector General has recommended that SSA seek legislative authority to share this data with DHS, but SSA responded that it is beyond the agency's purview to advance legislation to amend the Internal Revenue Code in order to allow DHS access to tax return information. IRS officials have also expressed concern that sharing this data could decrease tax collections and compliance. We are examining the usefulness of SSA data to DHS for these subcommittees, and will consider ESF issues as part of this work. Improving the usefulness of the data could help ensure that limited enforcement resources are targeted effectively. SSA data could help identify areas of unauthorized work, but closer collaboration among SSA, IRS, and DHS can help to ensure that the most useful data are available in a form that can be used efficiently for enforcement. Under the current data-sharing arrangement, DHS officials believe the agency would have to invest significant resources to determine whether employers it targets are really hiring persons who are not work authorized. DHS has stated that determining which nonwork SSN holders are now authorized to work may not be cost-effective and would pull resources from other national security-related initiatives. Neither SSA nor DHS is able to easily and quickly update work status because they lack a common identifier for their records. Updating status without a common identifier may not be practical because different spellings or name variations confound large-scale matching efforts. For example, an August 2005 report from the SSA's Office of the Inspector General highlights a substantial proportion of cases in which names were inconsistent between SSA and DHS. In at least six reports in recent years, SSA's Office of the Inspector General has recommended or mentioned prior recommendations that SSA work with DHS to update information about work authorization. SSA officials maintain that it is their policy to make changes to the Social Security record only if the SSN holder initiates the changes and provides evidentiary documents from DHS. SSA further states that a "resolution of the discrepant information between DHS and SSA would require more than a simple verification." Despite the many problems with the data, there are steps that could be taken to improve them. For example, the employers who submit the most earnings reports for nonwork SSNs might be good candidates for outreach and education about verifying work eligibility. SSA's Office of the Inspector General officials suggested that DHS send letters to employers of persons with nonwork SSNs. These letters could encourage persons listed as having nonwork SSNs, who are now authorized to work, to update their records. The ESF also has the potential to provide useful information to DHS, but this information has protected tax status. Although some of the same difficulties that pertain to the Nonwork Alien File could also affect the usefulness of the ESF to DHS enforcement efforts, if these challenges could be overcome, authorizing transmittal of at least some of the ESF information to DHS might be warranted. Producing accurate, useful data will require substantial continued effort on the part of SSA, DHS, and the IRS: these efforts will be of little value, however, if the data are not used for enforcement and to stimulate changes in employer and employee behavior. We have reported previously that the IRS program of employer penalties is weak, because of limited requirements on employers to verify and report accurate worker names and SSNs; we have recommended that IRS consider strengthening employer requirements, a course that could over time improve the accuracy of wage data reported to SSA. We have also reported that, consistent with DHS's primary mission in the post-September 11 environment, DHS enforcement resources have focused mainly on critical infrastructure industries in preference to general worksite enforcement. In such circumstances, coordination to leverage usable and useful SSA data is essential to ensure that limited DHS worksite enforcement resources are targeted effectively. The federal government likely can make use of information it already has to better support enforcement of immigration, work authorization and tax laws. The Earnings Suspense and the Nonwork Alien files have potential, but even the best information will not make a difference if the relevant federal agencies do not have credible enforcement programs. In fact, sharing earnings data to identify potential unauthorized workers could unnecessarily disclose sensitive taxpayer information if the data are not utilized by enforcement programs. To address unauthorized work more meaningfully, IRS, DHS and SSA need to work together to improve employer reporting, develop more usable and useful data sets for suspicious earnings reports, and better target limited enforcement resources. We look forward to contributing to this endeavor as we continue to conduct our work on using SSA data to help reduce unauthorized work. This concludes my prepared statement. I will be happy to answer any questions you may have. For questions regarding this testimony, please call Barbara Bovbjerg at (202) 512-7215. Other key contributors to this statement were Blake Ainsworth, Assistant Director; Lara Laufer, Analyst-in-Charge; Beverly Crawford; Susan Bernstein; Michael Brostek; Rebecca Gambler; Jason Holsclaw; Daniel Schwimer; Richard Stana; Vanessa Taylor; Walter Vance; and Paul Wright. 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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To lawfully work in the United States, individuals must have a valid Social Security number (SSN) and, if they are not citizens, authorization to work from the Department of Homeland Security (DHS). Noncitizens seeking work must provide both an SSN and evidence of work authorization to their employer. Yet individuals without these required authorizations have gained employment with false information. How these instances of unauthorized work can be identified or prevented challenges the federal agencies involved. Congress asked GAO to discuss how federal agencies can better share reported earnings data to identify unauthorized work. Specifically, this testimony addresses two issues: (1) the Social Security data that could help identify unauthorized employment and (2) coordination among certain federal agencies to improve the accuracy and usefulness of such data. The Social Security Administration (SSA) has two types of data that could be useful to reducing unauthorized work--individual Social Security records and earnings reports. Individual Social Security records, which include name, date of birth, and SSN, are used by SSA to provide verification services to employers wishing to assure themselves that the names and SSNs of their workers match SSA's records. SSA also uses Social Security records in a work authorization verification system developed by DHS called the Basic Pilot that offers electronic verification of worker status. These services are voluntary, and none are widely used by employers. SSA's earnings records provide additional information, which could be used as an enforcement tool to identify unauthorized work. Currently, SSA uses such records to produce two relevant files based on earnings records, which are the Nonwork Alien File and the Earnings Suspense File (ESF). The Nonwork Alien File contains earnings information posted to SSNs issued for nonwork purposes, suggesting that these individuals are working without authorization. The ESF contains earnings reports for which SSA is unable to match the name and SSN of the worker, suggesting employer error, SSN misuse, or unauthorized work activity. In addition, we have reported that the ESF, which contained roughly 250 million records as of December 2004, appears to include an increasing number of records associated with probable unauthorized work, but because of statutory constraints, the ESF is not available to DHS as an enforcement tool. Improving the usefulness of SSA data could help identify unauthorized work and ensure that limited enforcement resources are targeted effectively. Ensuring that the most useful data are available requires close coordination among the three federal agencies involved in collecting and using the data--SSA, the Internal Revenue Service (IRS), and DHS. We have previously recommended that IRS work with DHS and SSA as it considers strengthening its employer wage reporting regulations, as such action could improve the accuracy of reported wage data, and that DHS, with SSA, determine how best to use such wage data to identify potential illegal work activity. Efforts to improve data will only make a difference, however, if agencies work together to improve employer reporting and ensure they can conduct effective worksite enforcement programs.
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Defense has long operated multiple telecommunications systems to meet an array of mission needs, ranging from the command and control of military forces to its payroll and logistics support functions. Because military services and other Defense agencies independently procured and operated their own networks, Defense's communications environment has been fragmented and redundant. To improve the effectiveness and efficiencies of its military communications services, Defense began in 1991 to plan and implement DISN to serve as the Department's primary worldwide telecommunications and information transfer network to support national security and defense operations. Defense's DISN strategy focuses on replacing its older data communications systems, using emerging technologies and cost-effective acquisition strategies that provide secure and interoperable voice, data, video, and imagery communications services in support of military operations. Under Defense's DISN concept, the military services and Defense agencies will still be responsible for acquiring telecommunications services for their local bases and installations, as well as deployed communications networks. DISA will be responsible for acquiring the long-haul services that will interconnect these base-level and deployed networks within and between the continental United States, Europe, and the Pacific. DISA's current efforts focus on acquiring and implementing DISN CONUS services. For 10 years, Defense users obtained switched voice, data, video teleconferencing, and transmission services within the United States through the Defense Commercial Telecommunications Network (DCTN) contract with AT&T. The DCTN contract expired in February 1996. Since then, these services have been provided through a follow-on, sole-source DISN Transition Contract (DTC) with AT&T until Defense can fully implement its new DISN services. Defense estimates that DTC costs are approximately $18.5 million per month. In July 1995, we reported on Defense's efforts to plan and implement DISN. At that time, we recommended that Defense ensure that DISN plans and program decisions were based on a validated statement of DISN's operational requirements. By defining the minimal acceptable requirements for DISN as well as the critical technical characteristics, the operational requirements document would provide the basis for determining DISN's effectiveness. We also recommended that Defense develop an estimate of the acquisition, operations, maintenance, and support costs for DISN over its life-cycle. While Defense concurred with these recommendations, it has not yet completed either action. Nevertheless, given the expiration of its DCTN contract in February 1996, and its desire to limit the term of the sole-source DISN Transition Contract, DISA is proceeding with its DISN implementation efforts and has issued four RFPs supporting DISN's implementation: DISN Support Services - Global, to provide engineering, operations, network management, and other support services worldwide. DISN Switched/Bandwidth Manager Services - Continental United States (CONUS), to provide the capability to switch network traffic and provide bandwidth manager devices at designated service delivery points within the continental United States. DISN Transmission Services - CONUS, to provide access transmission services and transmission services connecting the bandwidth managers and switches provided under the switched/bandwidth manager contract, and to connect Defense installations with the DISN network. DISN Video Services - Global, to provide worldwide video teleconferencing through three video network hubs located in the continental United States. The timetable for receipt of proposals and contract awards is shown in table 1. DISA awarded the support services contract to Boeing Information Services, Inc., in June 1996, and awarded the switched/bandwidth manager services contract to MCI Corporation in August 1996. The evaluation of these proposals and subsequent contract awards addressed four factors: cost, technical, management, and past performance. DISA plans to award the video services contract on the same basis. Because transmission is a basic commodity service, Defense advised that it intends to award the transmission services contract primarily on the basis of lowest price. Defense plans full implementation of its DISN system within the continental United States by July 1997. The switched/bandwidth manager, transmission services, and video services acquisitions were subject to a bid protest in December 1995 by AT&T, which was adjudicated by the General Accounting Office (GAO). In this protest, AT&T argued that DISA arbitrarily refused to allow offerors to submit and have evaluated a single, comprehensive proposal, what AT&T termed an "integrated bid," as an alternative to submitting individual proposals under each RFP. GAO's decision, issued on May 1, 1996, upheld the legality of the acquisition strategy that DISA has followed. To obtain information about Defense's acquisition strategy, and the steps taken by Defense in determining and selecting that strategy, we obtained and analyzed copies of the DISN solicitations from DISA staff in the Washington, D.C., area. We analyzed studies prepared by DISA staff during April and May 1995 that identified and evaluated DISN acquisition alternatives. We reviewed Defense's DISN architecture and were briefed on steps taken to develop the DISN design by engineering staff at DISA's Joint Interoperability and Engineering Organization, Center for Systems Engineering, in Reston, Virginia. In addition, in conducting our review, we used supporting documentation from our bid protest decision. To obtain information about the specific evaluation methods and factors used to select a DISN acquisition strategy, we interviewed several DISA officials including the DISN Program Manager and the DISN Contracting Officer in Arlington, Virginia. Our review was conducted from August 1996 through October 1996 in accordance with generally accepted government auditing standards. In developing its DISN acquisition approach, Defense considered several acquisition alternatives in April and May 1995 including one--using a single contractor to furnish a comprehensive set of services to the government--that is similar to the integrated approach that AT&T had advocated. Defense also evaluated the costs and benefits of separately acquiring component services with the government integrating those components itself, and other alternative approaches as well. In reviewing Defense's analyses of alternatives, we found that Defense evaluated the advantages and disadvantages of each acquisition alternative in terms of relative cost and how it (1) met DISN requirements, (2) facilitated technology insertion and enhancement, (3) could be implemented within schedule constraints, and (4) supported Defense's control of the network. DISA selected an acquisition strategy that divided the acquisition into four components with four separately awarded contracts. Under this plan, DISA, with the assistance of the support services contractor, would acquire, integrate, operate, and maintain the separate DISN components rather than employ a comprehensive service provider to integrate and operate DISN. Defense believed that breaking the program into functional components facilitated control over network interoperability, integration, surge capacity, technology insertion, and security. It also concluded that by breaking the program into pieces, more vendors could bid for contracts, thus increasing competition. Further, in Defense's view, multiple contracts with frequent options made it easier to negotiate technological upgrades, and created incentives for vendors to maintain high standards of performance. Finally, Defense believed that the strategy encouraged vendors to offer their lowest prices on each separate contract instead of just offering prices that were averaged across the entire network. After issuing solicitations to implement this strategy, Defense received comments from industry contending that vendors could offer significant economies if they could submit one comprehensive, or integrated, bid for all of the business offered under the switched/bandwidth manager, transmission, and video services RFPs. Defense responded with an approach which staggers contract awards such that a vendor who wins the switched/bandwidth manager contract can use any economies that might accrue to its advantage when bidding for the remaining contracts. According to DISA, this approach enables the government to reap the potential cost savings of an integrated bid while maintaining maximum flexibility for cost-effective technical enhancements and continuing competition over the life of the program. Defense believes that it has selected the acquisition strategy that will yield the best value to the government over the course of DISN's life cycle. However, Defense lacks the baseline information needed for us to ensure whether this is the case. We recommended in July 1995 that Defense ensure that the DISN approach was based on valid operational requirements and that it identify the additional life-cycle acquisition, maintenance, and support costs that would be incurred in developing and operating DISN. In making these recommendations, we concluded that without this important information, Defense would lack a starting point for ensuring that DISN facilities and services effectively and efficiently met their requirements. While Defense concurred with our recommendations, it has not fully implemented them. Given the current advanced state of the DISN acquisition and the need to replace the high-cost transition contract, we are not questioning the need to continue to move forward with DISN. However, Defense still needs this baseline information to gauge the performance of DISN as it is being implemented. DISN program officials in DISA and staff from the Office of the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence have told us that DISN's requirements are known and documented because they are based on the requirements developed for Defense's current communications systems. However, we believe that the operational requirements in the existing systems are not valid for DISN because they do not consider several important factors. First, with the growth of worldwide telecommunications networks such as the Internet, the information warfare threat to Defense, and thus the need for security requirements, has significantly increased in the past decade. For example, we recently reported that Defense may have experienced as many as 250,000 computer attacks last year and that Defense estimates that these attacks are successful 65 percent of the time. We also reported that the number of attacks is doubling each year, as Internet use increases along with the sophistication of computer attackers and their tools.Second, since the new strategy calls for diversifying contractors, integration risks are significantly higher than those accompanying the previous contract and system management is much more complex. Third, users now have greater expectations for network services as telecommunications technology has made significant strides in recent years. Taken together, these changes clearly demonstrate the need for Defense to document and validate with DISN users the operational requirements for the new strategy. By better establishing its operational requirements and life cycle costs for DISN, Defense would lay the groundwork for assessing whether the system is meeting its cost and performance goals. The next step would be to develop effective measures for tracking DISN's progress against this baseline cost and performance information. Defense has not yet established any performance measures that would allow it to track whether DISN is meeting its objectives. Since Defense plans to begin implementing DISN CONUS in less than 8 months, the absence of these measures raises concerns that the Department will not be able to effectively manage DISN's implementation and operation. Establishing good performance measures is not only critical because of the risks confronting the DISN program, it is central to the success of any significant information system undertaking. We have previously reported, for example, that successful organizations rely heavily upon performance measures to achieve mission goals and objectives, quantify problems, evaluate alternatives, allocate resources, track progress, and learn from mistakes. For service-oriented programs such as DISN, these may include such measures as the percent of mission improvements resulting from the new service in terms of cost, time, quality, and quantity; the percent of customers satisfied with certain telecommunications services; or the number of problems resolved within target times. Once the right measures are chosen, they help management target problem areas, highlight successes, and generally increase the rate of performance improvement through enhanced learning. Further, several statutory requirements call for Defense to define cost, schedule, and performance goals for major defense acquisition programs and for each phase of the acquisition cycle of such programs. These include the Federal Acquisition Streamlining Act (FASA) of 1994 and the recently enacted Clinger-Cohen Act of 1996. The requirement to establish program cost estimates and performance measures of operational effectiveness are also embodied in Defense acquisition guidance. At present, Defense is far from meeting any of these requirements. For example, even basic objectives, such as DISN's ability to provide its users with the needed quality and volume of communications services, have not been validated by users and lack evaluation criteria upon which to measure success. Without this type of information, Defense has no way of knowing whether it will be spending billions of dollars acquiring, operating, and maintaining DISN facilities and services that efficiently and effectively meet its needs. Defense is striving to fully implement its DISN CONUS system by July 1997. However, it has yet to establish the basic cost and performance baseline information critical to laying the groundwork for assessing DISN's success. We continue to believe that Defense should expeditiously implement our previous recommendation to develop and document DISN operational requirements and to identify DISN life cycle costs. In addition, Defense has not established performance measures that would determine how the implementation of this multibillion dollar initiative measures up to its cost and operational goals. Establishing such measures now for DISN would markedly improve DOD's and the Congress' ability to manage and oversee implementation of this system by providing the basis for independent analysis and evaluation. We recommend that the Secretary of Defense direct the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence to establish the objective measures needed to gauge DISN's success. At a minimum, these measures should include the concerns of DISN customers and should correspond to the five factors--requirements, technology enhancement, schedule, management, and cost--that DISA used to select its acquisition strategy. We obtained written comments on a draft of this report and have incorporated those comments where appropriate. These comments are presented in appendix I. In commenting on the draft report, Defense concurred with our recommendation. We are encouraged that Defense intends to develop cost estimates and performance measures for major DISN components from this point forward. It is likewise important that Defense does so for the DISN-CONUS component currently being implemented. As stated in our report, these actions are critical in order for Defense to have an objective cost and performance baseline for measuring the success of this acquisition. As agreed with your office, we will send copies of this report to the Ranking Minority Member of the Senate Committee on Governmental Affairs, Chairman and Ranking Minority Member of the House Committee on Government Reform and Oversight, other interested congressional committees, the Secretary of Defense, and the Director of the Office of Management and Budget. Copies will be sent to others upon request. Please contact me at (202) 512-6240 if you or your staff have any questions. Major contributors to this report are listed in appendix II. Linda D. Koontz, Associate Director Franklin W. Deffer, Assistant Director Kevin E. Conway, Senior Information Systems Analyst Mary T. Marshall, Information Systems Analyst Cristina T. Chaplain, Communications 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 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. 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Pursuant to congressional request, GAO reviewed the steps taken by the Department of Defense (DOD) in selecting and implementing its acquisition strategy for the Defense Information System Network (DISN) Continental United States (CONUS), focusing on whether: (1) DOD considered alternative approaches, such as use of an integrated bid, in its selection of an acquisition strategy; and (2) the selected acquisition strategy will yield the best value to the government over DISN's life-cycle. GAO found that: (1) DOD considered several options prior to selecting an acquisition strategy for DISN, including an approach that would have involved using a single comprehensive service provider to furnish an integrated set of services to the government and another one that involved separately acquiring component services with the government integrating those components itself; (2) DOD considered the advantages and disadvantages of each option in terms of five factors: requirements; technology enhancement; schedule; management; and cost; (3) after evaluating its options and receiving industry comments on its draft request for proposals, DOD ultimately decided on an approach that calls for the Defense Information Systems Agency (DISA) to separately acquire and integrate component services itself, using contracts awarded on a staggered schedule; (4) DOD believes that this strategy will best meet national security needs at a reasonable cost; (5) in reviewing DOD's DISN efforts in 1995, GAO reported that DOD had yet to define the program's minimal acceptable requirements; (6) GAO also reported that DOD had not yet developed an estimate of what it would cost to acquire, operate, and sustain the DISN infrastructure; (7) without this information, DOD has no objective cost and performance baseline for measuring DISN's success; (8) without this baseline, GAO cannot determine whether the selected acquisition strategy will yield the best value to the government over the course of DISN's life cycle, which is estimated to be over 10 years; (9) once this baseline is developed, DOD must also establish effective measures for tracking DISN's progress; (10) at present, DOD is far from meeting federal requirements for establishing performance measures; and (11) by developing measures that focus on benefits, costs, and risks, DOD management can target problem areas, highlight successes, and ensure DISN meets its cost and performance goals.
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GPRA is intended to shift the focus of government decision-making, management, and accountability from activities and processes to the results and outcomes achieved by federal programs. New and valuable information on the plans, goals, and strategies of federal agencies has been provided since federal agencies began implementing GPRA. Under GPRA, annual performance plans are to clearly inform the Congress and the public of (1) the annual performance goals for agencies' major programs and activities, (2) the measures that will be used to gauge performance, (3) the strategies and resources required to achieve the performance goals, and (4) the procedures that will be used to verify and validate performance information. These annual plans, issued soon after transmittal of the president's budget, provide a direct linkage between an agency's longer-term goals and mission and day-to-day activities. Annual performance reports are to subsequently report on the degree to which performance goals were met. The issuance of the agencies' performance reports, due by March 31, represents a new and potentially more substantive phase in the implementation of GPRA--the opportunity to assess federal agencies' actual performance for the prior fiscal year and to consider what steps are needed to improve performance and reduce costs in the future. OPM's mission is to support the federal government's ability to have the best workforce possible to do the best job possible. OPM is to accomplish this mission by leading federal agencies in shaping human resources management systems to effectively recruit, develop, manage, and retain a high-quality and diverse workforce; protecting national values embodied in law, including merit principles and veterans' preference; serving federal agencies, employees, retirees, their families, and the public through technical assistance, employment information, pay administration, and benefits delivery; and safeguarding employee benefit trust funds. The results of OPM's efforts largely take place at federal agencies outside of the direct control of OPM. This section discusses our analysis of OPM's performance in achieving its selected key outcomes and the strategies it has in place, particularly strategic human capital management and information technology, for accomplishing these outcomes. In discussing these outcomes, we have also provided information drawn from our prior work on the extent to which the agency provided assurance that the performance information it is reporting is credible. We cannot assess progress made by OPM in contributing to the outcome that the federal government has an appropriately constituted workforce with the proper skills to carry out its missions. OPM has several goals that relate to this outcome, but none that focus squarely on the degree to which the federal workforce has the right skill mix. Specifically, OPM's fiscal year 2000 performance report includes goals that "federal human resources management policies and programs are merit-based, mission- focused, and cost effective" and "a model for workforce planning . . . is in place" for use by agencies. OPM's performance report states that both of these goals were met. OPM states that the first goal was met because it produced a few studies that contributed to human resource policy or program proposals. The second goal was met, according to the OPM fiscal year 2000 performance report, because OPM has provided the workforce planning model to several agencies. This model, and other important steps OPM has taken to support better workforce planning--including developing research tools and launching a website to facilitate information sharing about workforce planning issues--could prove helpful to agencies in addressing their individual strategic human capital challenges. As a next step, OPM needs to measure, for example, how the studies and workforce planning model actually contributed to improved strategic human capital management at the agencies. Specifically, as an intermediate outcome, OPM could measure the number of agencies that were able to identify skill shortages and solutions as a result of using workforce planning. Previously, we have reported that OPM should take a more proactive role in agency workforce planning efforts, and our April 2001 report on expected trends in federal employee retirements further highlights the need for improved workforce planning. Other information indicates that this outcome is not commonly being achieved. Our high-risk series gave many examples of agencies not having the appropriate workforce to carry out its mission. For example, the Department of Energy did not have employees with adequate contract management skills to oversee the clean up of hazardous waste sites, and nursing shortages at Veterans Affairs facilities could put veterans at risk. OPM's fiscal year 2002 plan contains several strategies that, for the most part, appear to be reasonable. For example, OPM plans to obtain input from agencies on how workforce policies need to be changed and to explore policies on dual compensation and phased retirement to bolster retention of federal employees. Determining whether these strategies are successful will require OPM to develop indicators of whether federal agencies and departments have appropriately skilled workforces and how these strategies are being used to build workforce skills. As is the case with the first outcome, OPM's performance report does not contain sufficient outcome measures to fully assess the extent to which federal employees are held accountable for their performance. OPM's performance report contains several goals related to this outcome. For example, OPM is to develop performance-oriented approaches to employee compensation and to provide assistance in developing performance management systems. OPM measures goal achievement by such indicators as the number of workshops offered, the number of performance studies available on the OPM Website, and whether performance management guidance is issued in a timely manner. Other information indicates that much more needs to be done to improve performance management at federal agencies. For example, in our October 2000 report, we noted that surveys we had administered to managers showed that only 26 percent in 1997 and 31 percent in 2000 reported that employees in their agencies had received positive recognition to a great or very great extent for helping agencies accomplish their strategic goals. Also, the Merit Systems Protection Board (MSPB) and we have previously reported that holding employees accountable for their job performance continues to be perceived as a challenge because employees perceive the process as cumbersome. OPM's plan identifies a variety of strategies for achieving goals that relate to the outcome of evaluating, rewarding, and otherwise holding federal employees accountable for their performance. The strategies call for providing guidance and information to agencies, including information on best practices, as well as working with internal and external stakeholders to identify needed changes in compensation and performance policies and programs. Although the strategies appear reasonable, how they will help to achieve the outcome of holding employees accountable for performance is not always clear. For example, a strategy OPM cited to help achieve its goal of identifying options for performance-oriented approaches to compensation was to maintain comprehensive research on best practices in private and public sector compensation systems and tools that the federal government can use. But OPM offers no explanation of how the use of such systems and tools will aid the federal government in holding employees accountable for their performance. OPM has made mixed progress on the outcome that federal agencies adhere to merit system principles. On the one hand, OPM's fiscal year 2000 performance report states that OPM's periodic reviews of agencies have identified no systemic merit principle weaknesses. On the other hand, the results of OPM's government-wide survey of federal employees conducted in fiscal years 1999 and 2000 indicate that a sizable percentage of employees think that certain merit principles are not being followed. The fiscal year 2000 performance report includes goals related to the overall adherence to merit principles by agencies, including agencies with delegated examining authority. OPM uses a variety of measures to determine if this outcome is being achieved, including (1) the results of merit system reviews of federal agencies, (2) agencies' satisfaction with the reviews, and (3) the views of federal employees regarding adherence to merit principles. OPM's report states that the reviews indicated that agencies, including those with delegated examining authority, were adhering to merit principles. According to the performance report, the problems found in OPM's reviews were not systemic. Once problems were identified in the review, OPM worked with the agency to resolve the problems. In its reviews, OPM also identified best practices and shared them with other agencies. The views of federal employees on adherence to the nine merit system principles, as provided in an OPM survey, indicated that there was no significant change from the fiscal year 1999 survey. OPM's goal was to increase by two percentage points the percentage of federal employees who believed each of the merit principles were being adhered to by their agencies. There are a variety of factors that influence employees' responses to this question, including governmentwide economic, cultural, and social conditions. For this reason, OPM expects substantive change in the perceptions of these principles to take place over several years. This year's survey indicates that a relatively large portion of federal employees believed that employees maintain a high standard of integrity and concern for the public and that employees are protected from improper political influence. But on the other hand less than half believe that employees are protected against reprisal for the lawful disclosure of information or are provided equal pay for equal work and rewarded for excellent performance; and only a little more than half think that employees are managed efficiently and effectively. Similar results were reported in the merit system principles survey conducted by MSPB in 2000. OPM's fiscal year 2002 performance plan identifies a variety of strategies that are consistent with its current efforts. The current strategies should help OPM achieve its goals as well as contribute to the outcome of ensuring that agencies adhere to the merit system principles. For example, to help ensure that personnel practices are carried out in accordance with these principles, OPM's strategies include conducting nationwide agency merit system oversight reviews, auditing agencies with delegated examining authority and reviewing reports filed by these agencies to identify any training needs, and reviewing all agency selections for initial career Senior Executive Service appointments for compliance with merit system principles. OPM does not include coordination with MSPB as a strategy for achieving performance goals within its Office of Merit Systems Oversight and Effectiveness--the program office that is responsible for leading the federal government's efforts in overseeing the merit system. MSPB's mission, in part, is to ensure that agencies make employment decisions in accordance with the merit system principles. In support of its mission, MSPB hears and decides cases involving abuses of the merit system. It also administers the merit principles survey to gather data on the "health" of the federal civil service. OPM's strategy should also consider MSPB's decisions and merit principles survey in helping to achieve this outcome. However, even though both agencies administer programs and conduct similar activities that share a common purpose, OPM's strategic plan for fiscal years 2000 through 2005 states that coordination with MSPB is limited to adjudicatory issues. We could not fully assess the progress OPM is making to reduce fraud and error in the Federal Employees Health Benefits Program. The OPM OIG has identified health care fraud in the Federal Employees Health Benefits Program as one of the most serious management challenges facing OPM. The fiscal year 2000 performance report contains an OIG goal to have fraud against OPM programs detected and prevented. This goal has several measures, including the number of convictions for health benefit program fraud (51 in fiscal year 2000) and the number of health benefit providers who are debarred and not allowed to participate in the Federal Employees Health Benefits Program (2,706 in fiscal year 2000). Although these are measures for the OIG, there were no goals or strategies related to the detection and prevention of fraud at the programmatic level for the Federal Employees Health Benefits Program in the Office of Retirement and Insurance Service (RIS), whose mission, in part, is to provide accurate and cost-efficient benefit services. For example, there were no goals or strategies to decrease the number of errors or fraud cases to a minimum. In addition, there were no baseline indicators of the dollar amount of fraud or errors found in the health benefits program or quantitative targets against which to measure progress. OPM believes that measures identified by the OIG are consistent with RIS' expectations and says that RIS has worked in unison with the OIG to minimize fraud and abuse in the Federal Employees Health Benefits Program. While we recognize this, we believe that OPM needs to develop goals and measures within RIS for detecting and preventing fraud and errors in the health benefits program. The fiscal year 2002 performance plan contains a strategy to have the employee benefit trust funds be models of excellence and integrity in financial stewardship. The OIG includes strategies related to reducing fraud and errors, such as pursuing debarment of untrustworthy health care providers and conducting aggressive investigations where fraud and abuse are suspected, which seem reasonable. The RIS had no goals or performance indicators related to fraud and errors in the health benefits program, but included strategies such as (1) working with carriers participating in health benefits to ensure that audits are performed and (2) conducting financial statement audits to reduce the incidence of payment errors, which in part will help detect fraud and errors in the health benefits program. Although these strategies generally will help detect and reduce fraud and errors, it is unclear how this will be accomplished and how they plan to measure progress because there were no baseline indicators for the dollar amount of fraud or errors found in the health benefits program, or performance indicators against which to measure progress. In addition, performance indicators for the OIG measured progress in processing cases (debarments, indictments, and convictions) once the fraud is discovered but did not address measures for preventing it. The fiscal year 2000 performance report describes mixed progress in the provision of timely and accurate retirement and insurance services. OPM's retirement and insurance program continues to receive high satisfaction ratings from its customers, but timeliness of retirement claims processing has declined. The fiscal year 2000 performance report outlines several outcome-oriented goals that include increasing customer satisfaction with services and reducing processing times. Customer satisfaction with OPM's retirement and insurance programs remained high during fiscal year 2000. For example, more than 90 percent of new retirees said they were very or generally satisfied with how their claims were handled. Claims processing times, however, did not meet target levels, particularly the time to process Federal Employees Retirement System (FERS) claims. Specifically, Civil Service Retirement System (CSRS) claims processing time increased to 44 days from 32 days in fiscal year 1999 and FERS processing time increased to more than 6 months from 3 months in fiscal year 1999. The goal for CSRS processing time is 25 days and for FERS processing time is 60 days. OPM recognizes that it needs to address lagging times in retirement claims processing, and the fiscal year 2002 performance plan contains strategies that could improve claims processing timeliness. The plan states that the current processing is based on "aging technology, paper-based business processes, and a heavy reliance on human resources." One of the strategies cited in OPM's plan for reducing claims processing times is to add more resources to the processing of FERS claims. OPM's measure of its success in achieving this goal is to gradually reduce processing times for these claims from a fiscal year 2000 level of 6 months to 5 months in fiscal year 2001 and 3 months in fiscal year 2002. The number of FERS claims is expected to increase by nearly 40 percent between fiscal year 2000 and fiscal year 2002. The number of employees seeking retirement services is expected to dramatically increase beyond 2002. To address long-term needs, OPM is implementing a Retirement Systems Modernization project that is expected to significantly reengineer and automate retirement claims processing. OPM is implementing the modernization of the retirement systems in phases and expects to realize significant business benefits each year. OPM says it has already seen improvements. For example, OPM says it implemented a prototype FERS Benefit Calculator that has helped to reduce processing times and the balance of aged cases. However, the modernized retirement systems will not be fully operational until 2009. Reducing claims processing times with an increasing workload will be a significant challenge for OPM. OPM has made some improvements to its fiscal year 2000 performance report and fiscal year 2002 performance plan over previous years. However, a number of weaknesses continue that OPM recognizes. This section describes improvements and remaining weaknesses in OPM's (1) fiscal year 2000 performance report in comparison with its fiscal year 1999 report, and (2) fiscal year 2002 performance plan in comparison with its fiscal year 2001 plan. OPM's fiscal year 2000 performance report represents an improvement over the fiscal year 1999 report, but opportunities remain for additional improvements. In our June 2000 report we indicated that OPM's fiscal year 1999 performance report did not identify the most critical performance measures towards goal achievement. The fiscal year 2000 report clearly identifies the most critical measures of the several measures that are included under most goals. If the critical indicator was met, then OPM considered the goal met. Last year we noted a number of performance report weaknesses, including the use of activity-based indicators instead of outcome-based indicators and the lack of specific target measures for goals. Again for fiscal year 2000, many indicators are activity based or do not contain specific targets. The following are examples of activity-based measures or those without targets: To determine whether delegated examining is conducted in accordance with merit system laws, OPM measured the number of reviews conducted of agency-delegated examining activities. An OPM measure is to ensure that the OPM workforce is well trained for current and future needs; however, there is no target identified to determine when this has been achieved. In measuring customer or employee satisfaction, OPM uses terms such as "high degree" of satisfaction without defining what constitutes a "high degree" of satisfaction. OPM does not identify which positive feedback rate (e.g., 80 percent or 90 percent) is judged to be "high satisfaction" for the particular indicator. A performance management goal is for OPM to formulate performance- oriented approaches to compensation. OPM considered this goal met because it disseminated information on state-of-the-art compensation practices. Even though these measures indicate positive activity, they are not measures of actual goal achievement, and without specific targets it is not possible to determine whether the goal was met. The fiscal year 2000 performance report also contains some measures that were not considered reliable by the OPM OIG. The performance report states that the Inspector General reviewed 116 of the 458 performance measures and found that 59 percent were based on reliable information and 17 percent were based on unreliable information; for 24 percent of the measures, the OIG could not determine their reliability. Further, concerns exist about the reliability of key surveys that are used by OPM as measures for goal achievement throughout the performance report. The low participation rates for the current Human Resources Directors' Survey and the earlier Human Resources Specialists Survey (which was not conducted in fiscal year 2000) pose a material risk that the respondents may not be representative of the overall survey population. In addition, in the case of the Human Resources Directors' Survey, the low participation rate caused a margin of error of 9.9 percent, limiting the usefulness of the results. The fiscal year 2002 performance plan continues with several of the strengths of the 2001 plan. The plan is directly linked to the OPM strategic plan and is integrated with the OPM Congressional Budget Justification. The plan also includes a resource summary by major OPM strategic goal, including the dollars and full-time equivalents requested by goal. The fiscal year 2002 plan, like the fiscal year 2000 report, contains a number of OPM activity-based, rather than outcome-based, goals and measures or indicators. The fiscal year 2002 plan continues to rely on the results of some governmentwide surveys and secondary anecdotal information to measure whether target levels established in the previous years' plans have been met. The 2002 plan discusses steps that OPM will take to address some of the weaknesses with these surveys and anecdotal information. For example, OPM states in its 2002 plan that it discontinued several indicators that were based on unreliable data sources. The reliability and validity of informal feedback has inherent limitations that cannot be made more reliable and statistically valid by the planned enhancement of procedures to collect and track the information. OPM is proceeding with the implementation of a new measurement framework. It plans to conduct more formal evaluations of the outcomes of specific policies and programs, identify agency-level performance measures, use agency-level measures as the primary basis of performance reporting, and tie the measures more closely to the strategic goals. This section discusses the extent to which OPM is internally addressing strategic human capital management and information security. Both OPM's performance report, as well as its plan, address these challenges within the agency. Regarding OPM's internal strategic human capital management, we found that the fiscal year 2002 performance plan contains several goals and measures related to OPM's internal strategic human capital management, and OPM's fiscal year 2000 performance report describes progress in resolving some of these OPM-level strategic human capital management challenges. For example, both the report and the plan contained goals related to recruiting, retaining, and managing a workforce to meet OPM program needs. Of particular note was the requirement that all employee performance plans be linked to agency strategic goals and the establishment of baseline data to measure the rate of retention among employees who complete career development programs. To further improve its strategic human capital management goals and strategies, OPM needs to link these strategies to specific OPM programs. For example, the OPM performance plan states that OPM has significantly changed its ratio of employees to supervisors to now exceed the governmentwide average. OPM's performance plan also states that it wants to further increase this ratio. The plan needs to also discuss what impact this ratio change will have on program outcomes and what additional human capital strategies might be needed to address the reduction in the number of supervisors. OPM also could establish the relationship of impending retirements to OPM succession planning processes to ensure that critical competencies and leadership are available for mission-critical activities. With respect to information security, we found that OPM's fiscal year 2002 performance plan contains a goal and measures related to information security, and the agency's fiscal year 2000 performance report explains its progress in resolving its information security challenges. OPM reports that in fiscal year 2000, it met its goal of ensuring that the information security program provided adequate computer security commensurate with the risk and magnitude of harm that could result from loss or compromise of mission-critical information technology systems. However, the results of the independent public accountant's audit of OPM's fiscal year 2000 consolidated financial statements show that a reportable condition continues to exist in the electronic data processing general control environment. The audit noted weaknesses in (1) entity-wide security, (2) access control, (3) control over application changes and software development, and (4) service continuity planning. The target date for describing the corrective action taken to resolve these deficiencies is fiscal year 2001. The fiscal year 2002 performance plan includes a goal to enhance information security. The plan states that the absence of critical security problems is the critical indicator for achieving this goal. OPM's mission, in part, is to provide strategic human capital management leadership and services to federal agencies. OPM's fiscal year 2000 performance report and fiscal year 2002 performance plan contain many goals that measure the extent of their activities, but there are few goals and measures that assess the actual state of strategic human capital management in the federal government or the specific contributions that OPM's programs and initiatives make. Even though OPM does not directly control these outcomes in federal agencies, it needs to measure the results to assess how well its leadership and services are working. OPM has recognized this weakness and is working with federal department and agency human resource directors to develop a series of human capital measures. OPM also needs to make other improvements to its report and plan, including strengthening goals and measures to improve their reliability, linking its internal human capital goals to OPM programs, and establishing a program management performance goal to assess fraud and error in the Federal Employees Health Benefits Program. To better assess OPM programs, we recommend that as a part of OPM's continued strengthening of its efforts to clearly define goals, measure its performance, and provide leadership over strategic human capital management, the Director of OPM develop goals and measures that assess the state of human capital at federal departments and agencies, replace informal feedback measures with indicators that are more reliable, and better link internal strategic human capital management goals to specific OPM programs and outcomes. In addition, we also recommend that the Director of OPM develop goals and measures that assess the prevention and detection of fraud and errors in the Federal Employees Health Benefits Program, perform a risk assessment to identify areas most vulnerable to fraud and errors, and institute internal controls to prevent and detect occurrences. Our evaluation was generally based on the requirements of GPRA, the Reports Consolidation Act of 2000, guidance to agencies from the Office of Management and Budget (OMB) for developing performance plans and reports (OMB Circular A-11, Part 2), previous reports and evaluations by us and others, our knowledge of OPM's operations and programs, our identification of best practices concerning performance planning and reporting, and our observations on OPM's other GPRA-related efforts. We also discussed our review with OPM officials and with OPM's OIG. The agency outcomes that were used as the basis for our review were identified by the Ranking Minority Member, Senate Governmental Affairs Committee as important mission areas for the agency and generally reflect the outcomes for all of OPM's programs or activities. The major management challenges confronting OPM--including the governmentwide high-risk areas of strategic human capital management and information security that we identified in our January 2001 performance and accountability series and high-risk update--were identified by us and by OPM's OIG in December 2000. We did not independently verify the information contained in the performance report and plan, although we did draw from other GAO work in assessing the validity, reliability, and timeliness of OPM's performance data. We conducted our review from April 2001 through June 2001 in accordance with generally accepted government auditing standards. We provided a draft of this report to OPM for its review and comment. OPM's Acting Director provided written comments, which are reprinted in appendix II. Overall, he agreed with the results our review, including our recommendations, and appreciated our recognizing the strategic challenges OPM faces with regard to human capital management as well as its efforts to improve its measurement framework, including the shift to measuring governmentwide outcomes. OPM also provided specific comments to clarify information we presented on four of the five selected key outcomes. We made several changes to this report in response to these comments. Our responses are given in appendix II as well as in various sections of this report. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to appropriate congressional committees; the Acting Director of OPM, and the Director of OMB. Copies will also be made available to others on request. If you or your staff have any questions, please call me at (202) 512-6806. Key contributors to this report were Bill Doherty, Danielle Holloman, Linda Lambert, Mary Martin, Elizabeth Martinez, Ben Ritt, Ed Stephenson, and Scott Zuchorski. Table 1 identifies the major management challenges confronting OPM, which include the governmentwide high-risk areas of strategic human capital management and information security. The first column lists the challenges that we and/or OPM's OIG have identified. The second column discusses what progress, as discussed in its fiscal year 2000 performance report, OPM has made in resolving its challenges. The third column discusses the extent to which OPM's fiscal year 2002 performance plan includes performance goals and measures to address the challenges that we and/or OPM's OIG identified. We found that OPM's performance report discussed the agency's progress in resolving all challenges. Of the agency's seven major management challenges, its performance plan had goals and measures that were directly related to all seven of the challenges. OPM can build upon its efforts by more clearly identifying the specific strategies that it is using to address its challenges. Such information is important to help OPM, the Congress, and other decisionmakers determine whether the best mix of strategies is in place and to help pinpoint improvement opportunities. The following are GAO's comments on the specific comments contained in the enclosure to OPM's letter dated June 26, 2001. 1. We revised this report to show that the retirement systems modernization project is being implemented in phases and that it will not be fully operational until 2009. 2. In the draft of this report provided to OPM for comment, we stated that OPM's goal for fiscal year 2000 was to make the workforce planning model available to agencies for their use and that this goal was met. Although making the model available to agencies is a useful activity, OPM's performance report and plan do not make clear what the outcome or result was from this activity. For example, neither document provides information on how agencies have used this model to help ensure that they have an appropriately constituted, properly skilled workforce to carry out their missions. OPM comments "there is already real evidence that the model has been of assistance, as all Federal agencies are meeting a deadline of June 29, 2001, to provide the Office of Management and Budget with individual workforce analyses as a first step in meeting the President's initiative to use human capital planning to streamline Government." The basis upon which OPM makes this statement is unclear, because although OPM says the workforce planning model has been of assistance to agencies, it does not say how many agencies actually used it in responding to OMB's directive. 3. We recognize that OPM's goal for fiscal year 2000 was to complete its research on private and public sector best practices in compensation systems and tools. However, OPM does not describe in its fiscal year 2000 performance report or 2002 performance plan what outcome or result was expected for this activity-based goal in terms of ensuring employee performance accountability. Thus, we continue to believe that OPM needs to have goals, measures, and strategies in place that will show how the use of the compensation systems and tools identified as a result of its research will aid the federal government in holding employees accountable for their performance. 4. We changed the report to recognize OPM's belief that the measures the OIG identified for detecting fraud and error in the Federal Employees Health Benefits Program are consistent with RIS' expectations. However, as we have stated in this report, the OIG's measures relate to detecting fraud after it has occurred rather than preventing it. Accordingly, we continue to believe that OPM needs to develop goals and measures within the program office, RIS, for detecting and preventing fraud and errors in the health benefits program. OPM commented that it will look for ways to develop additional program- wide goals and measures relating to fraud and errors in the federal health benefits program. 5. In addition to the changes described in comment 1, we changed the report to reflect that the retirement systems modernization project has not been delayed. We also cited an example of improvements OPM has seen thus far in implementing the modernized retirement systems.
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This report reviews the Office of Personnel Management's (OPM) fiscal year 2000 performance report and fiscal year 2002 performance plan. OPM's mission, in part, is to provide strategic human capital management leadership and services to federal agencies. OPM's fiscal year 2000 performance report and fiscal year 2002 performance plan contain many goals that measure the extent of their activities, but there are few goals and measures that assess the actual state of strategic human capital management in the federal government or the specific contributions that OPM's programs and initiatives make. Although OPM does not directly control these outcomes in federal agencies, it needs to measure the results to assess how well its leadership services are working. OPM recognizes this weakness and is working with human resource directors at federal agencies to develop a series of human capital measures. In its report and plan, OPM also need to strengthen goals and measures to improve their reliability, link its internal human capital goals to OPM programs, and establishing a program management performance goal to assess fraud and error in the Federal Employees Health Benefits Program.
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The success of crosscutting, multi-organizational efforts depends on certain key concepts to meld organizational efforts. These include central leadership, an overarching strategy, effective partnerships, and common definitions. These are critical elements that underpin the Government Performance and Results Act of 1993 or were shown as critical in our related work on combating terrorism efforts and the successful resolution of Y2K computer problems. In March 2002, we testified about these elements in terms of promoting partnerships in the development of a national strategy for homeland security. We have previously reported that the general tenets embraced by the Results Act provide agencies with a systematic approach for managing programs. The Results Act principles include clarifying missions, developing a strategy, identifying goals and objectives, and establishing performance measures. When participants in a crosscutting program understand how their missions contribute to a common strategy, they can develop goals and objectives and implementation plans to reinforce each other's efforts and avoid duplicating or inadvertently obstructing them. Moreover, a uniformly rigorous approach to assessing performance can enable the Executive Branch and the Congress to identify programs that are not operating as intended and target corrections as needed. Our work on combating terrorism indicated that without central leadership and an overarching strategy that identifies goals and objectives, priorities, measurable outcomes, and state and local government roles, the efforts of the more than 40 federal entities and numerous state and local governments were fragmented. Specifically, we found that key interagency functions in combating terrorism resided in several different organizations and that this redundancy led to duplication of effort. We reported that state and local officials have expressed concerns about duplication and overlap among federal programs for training about weapons of mass destruction and related matters. Some officials said that the number of federal organizations involved created confusion concerning who was in charge. As we noted in our September 2001 report on combating terrorism, a representative of the International Association of Fire Chiefs testified similarly that efforts would benefit greatly from an increased level of coordination and accountability. Our work also showed that common definitions promote effective agency and intergovernmental operations and permit more accurate monitoring of expenditures at all levels of government. Effective partnerships are also key in crosscutting efforts. In the Y2K effort, for example, the issues involved went beyond the federal government to state and local governments and to key economic sectors, such as financial services, power distribution, and telecommunications. A failure in any one area could have affected others, or critical services could have been disrupted. Thus, the President's Council on Year 2000 Conversion established more than 25 working groups drawn from different economic sectors and initiated numerous outreach activities to obtain the perspectives of those involved on crosscutting issues, information sharing, and the appropriate federal response. Lastly, in March 2002, we testified on the need for a national strategy to improve national preparedness and enhance partnerships among federal, state, and local governments to guard against terrorist attacks. This strategy should clarify the appropriate roles and responsibilities of federal, state, and local entities and establish goals and performance measures to guide the nation's preparedness efforts. Homeland security is a priority among public and private sector entities, but their efforts are not fully unified. Federal agencies are undertaking homeland security initiatives, but without the national strategy cannot know how the initiatives will support overarching goals and other agencies. Some state and local governments and private sector entities are waiting for further guidance on national priorities, roles and responsibilities, and funding before they take certain additional action. A key step toward a more unified approach was achieved in October 2001 with Executive Order 13228, when the President established a single focal point to coordinate efforts against terrorism in the United States--the Office of Homeland Security. The national strategy is under development, and partnerships among federal, state, and local governments and the private sector are evolving. However, the federal government does not yet have commonly accepted and authoritative definitions for key terms, such as homeland security. Public and private sector entities have been either pursuing their own homeland security initiatives without assurance that these actions will support the overall effort, or they have been waiting for further guidance before undertaking certain new initiatives. For example, the U.S. Coast Guard has realigned some resources to enhance port security, drawing them from maritime safety, drug interdiction, and fisheries law enforcement. Similarly, the Customs Service has used approximately 1,500 personnel since September 11 in support of the Federal Aviation Administration's Air Marshal program and the Federal Bureau of Investigation's Joint Terrorism Task Forces; Customs Service aircraft and crews were assigned to assist the North American Aerospace Defense Command; and the Customs Service also undertook other initiatives to bolster homeland security. The Department of Defense has initiated two major operations. Operation Enduring Freedom is a combat mission conducted overseas in direct pursuit of terrorists and their supporters, while Operation Noble Eagle concerns increased security required for the nation's homeland. To help accomplish these new efforts, the department has recommended and been authorized to create a new unified command--the Northern Command--to lead all of the department's military homeland security missions and activated almost 82,000 Reserve and National Guard service members for participation in these operations. The Department of Transportation in response to legislation established the Transportation Security Administration and is in the process of hiring over 30,000 baggage screeners at airports across the United States. In addition, the Department of Health and Human Services, including the Centers for Disease Control and Prevention, have received significant new funding to support its homeland security programs. At the same time, officials from these agencies as well as associations of state officials stated that they were waiting for the Office of Homeland Security to provide a vision and strategy for homeland security and to clarify additional organizational responsibilities. Certain state officials said that they are uncertain about additional roles for state and local governments as well as how they can proceed beyond their traditional mission of managing the consequences of an incident or providing for public health and safety. Uncertainty about funding may also impede a unified approach to homeland security. At the time of our report, officials representing state and local governments as well as the private sector believed they were unable to absorb new homeland security costs. The National Governor's Association estimated fiscal year 2002 state budget short falls of between $40 billion and $50 billion, making it difficult for the states to take on new initiatives without federal assistance. Similarly, representatives from associations representing the banking, electrical energy, and transportation sectors told us that member companies were concerned about the cost of additional layers of security. For example, according to National Industrial Transportation League officials, transport companies and their customers are willing to adopt prudent security measures (such as increased security checks in loading areas and security checks for carrier drivers), but are concerned about the impact and cost of new regulations to enhance security on their ability to conduct business. At the same time, the North American Electric Reliability Council officials told us that utility companies need a way to recoup expenses incurred in protecting facilities the federal government deems critical to homeland security. As we have testified, our previous work on federal programs suggests that the choice and design of policy tools have important consequences for performance and accountability. Governments have a variety of policy tools including grants, regulations, tax incentives, and regional coordination and partnerships to motivate or mandate other levels of government or the private sector to address security concerns. Key to the national effort will be determining the appropriate level of funding in order that policies and tools can be designed and targeted to elicit a prompt, adequate, and sustainable response while protecting against federal funding being used as a substitute for state, local, or private sector funding that would have occurred without federal assistance. Inadequate intelligence and sensitive information sharing have also been cited as impediments to participation in homeland security efforts. Currently, no standard protocol exists for sharing intelligence and other sensitive information among federal, state, and local officials. Associations of state officials believe that intelligence sharing has been insufficient to allow them to effectively meet their responsibilities. According to a National Emergency Management Association official, both state and local emergency management personnel have not received intelligence information, hampering their ability to interdict terrorists before they strike. According to this official, certain state and local emergency management personnel, emergency management directors, and fire and police chiefs hold security clearances granted by the Federal Emergency Management Agency; however, these clearances are not recognized by other federal agencies, such as the Federal Bureau of Investigation. The National Governors' Association agreed that inadequate intelligence- sharing is a problem between federal agencies and the states. The association explained that most governors do not have security clearances and, therefore, do not receive classified threat information, potentially undermining their ability to use the National Guard to prevent an incident and hampering their emergency preparedness capabilities to respond to an incident. On the other hand, the Federal Bureau of Investigation believes that it has shared information with state or local officials when appropriate. For example, field offices in most states have a good relationship with the emergency management community and have shared information under certain conditions. At the same time, bureau officials acknowledged that the perception that a problem exists could ultimately undermine the desired unity of efforts among all levels of government. Even federal agencies perceived that intelligence sharing was a problem. For example, Department of Agriculture officials told us that they believe they have not been receiving complete threat information, consequently hampering their ability to manage associated risks. Some homeland security initiatives to unify efforts are in place or under development. At the same time, we could not confirm that another key element, a definition of homeland security, was being addressed at the time we collected data for our report. The President established the Office of Homeland Security to serve as the focal point to coordinate the nation's efforts in combating terrorism within the United States. The office is developing a national strategy and has begun to forge partnerships within the interagency system, with state and local governments, and with the private sector by establishing advisory councils comprised of government and nongovernment representatives. However, implementing the national strategy will be a challenge. The partnerships are not fully developed, and an authoritative definition of homeland security does not exist. In October 2001, the President established a single focal point to coordinate efforts to combat terrorism in the United States--the Office of Homeland Security. This action is generally consistent with prior recommendations, including our own, to establish a single point in the federal government with responsibility and authority for all critical leadership and coordination functions to combat terrorism. We had also recommended that the office be institutionalized in law and that the head of the office be appointed by the President and confirmed by the Senate. As constituted, the office has broad responsibilities, including (1) working with federal, state, and local governments as well as private entities to develop a national strategy and to coordinate implementation of the strategy; (2) overseeing prevention, crisis management, and consequence management activities; (3) coordinating threat and intelligence information; (4) reviewing governmentwide budgets for homeland security and advising agencies and the Office of Management and Budget on appropriate funding levels; and (5) coordinating critical infrastructure protection. The Office of Homeland Security is collaborating with federal, state, and local governments and private entities to develop a national strategy and coordinate its implementation. The strategy is to be "national" in scope, including states, localities, and private-sector entities in addition to federal agencies. It is to set overall priorities and goals for homeland security and to establish performance measures to gauge progress. At the federal level, the strategy is to be supported by a crosscutting federal budget plan. The national strategy is to assist in integrating all elements of the national effort by ensuring that missions, strategic goals, priorities, roles, responsibilities, and tasks are understood and reinforced across the public and private sectors. The office plans to deliver the national strategy to the President in June 2002. Officials at key federal agencies indicate that they expect the national strategy to provide a vision for homeland security and prioritize and validate organizational missions for homeland security. However, achieving the support of all of the organizations involved in devising and implementing the strategy is a daunting challenge because of their specialized, sometimes multiple missions; distinctive organizational cultures; and concerns about how forthcoming initiatives might affect traditional roles and missions. Partnerships are being established among federal, state, and local governments, and private sector entities to promote a unified homeland security approach. First, Executive Order 13228, which established the Office of Homeland Security, also established a Homeland Security Council made up of the President, Vice President, the Secretaries of the Treasury, Defense, Health and Human Services, and Transportation, the Attorney General, and the Directors of the Federal Emergency Management Agency, Federal Bureau of Investigation, Central Intelligence, the Assistant to the President for Homeland Security, and other officers designated by the President. Second, the President also established interagency forums to consider policy issues affecting homeland security at the senior cabinet level and sub-cabinet levels. Third, to coordinate the development and implementation of homeland security policies, the Executive Order created policy coordination committees for several functional areas of security, such as medical/public health preparedness and domestic threat response and incident management. These committees provide policy analysis in homeland security and represent the day-to-day mechanism for the coordination of homeland security policy among departments and agencies throughout the federal government and with state and local governments. In addition, the President established a Homeland Security Advisory Council with members selected from the private sector, academia, professional service associations, federally funded research and development centers, nongovernmental organizations, and state and local governments. The council is advised by four committees representing (1) state and local officials; (2) academia and policy research; (3) the private sector; and (4) local emergency services, law enforcement, and public health/hospitals. The function of the Advisory Council includes advising the President through the Assistant for Homeland Security on developing and implementing a national strategy; improving coordination, cooperation, and communication among federal, state, and local officials and private sector entities; and advising on the feasibility and effectiveness of measures to detect, prepare for, prevent, protect against, respond to, and recover from terrorist threats or attacks within the United States. In terms of interagency partnerships, federal agencies in some program areas have formal mechanisms to support collaboration, and other agencies report improvement in communication and cooperation. For example, the Federal Emergency Management Agency has coordinated the emergency response capabilities of 26 federal agencies and the American Red Cross by developing a comprehensive plan that establishes their primary and secondary disaster relief responsibilities, known as the Federal Response Plan. The plan establishes a process and structure for the systematic and coordinated delivery of federal assistance to state and local governments overwhelmed by a major disaster or emergency. As another example, the Department of Justice, as directed by Congress, developed the Five-Year Interagency Counterterrorism and Technology Crime Plan. The plan, issued in 1988, represents a substantial interagency effort. After the events of September 11, officials from the Federal Emergency Management Agency, the Environmental Protection Agency, and the Departments of Agriculture, Energy, Transportation, and the Treasury told us that their relationships with other federal agencies have improved. For example, some agencies reported increased contact with the intelligence community and regular contact with the Office of Homeland Security. Some agencies have indicated that they also provided a new or expanded level of assistance to other agencies. For example, the Department of Agriculture used its mobile testing labs to help test mail samples for anthrax; the Department of Defense provided security to the National Aeronautics and Space Administration prior to and during the launch of the space shuttle and to the Secret Service at such major sporting events as the Winter Olympics in Utah and the Super Bowl in New Orleans, Louisiana, in 2002; and the National Guard assisted with the security of commercial airports throughout the United States. Although the federal government can assign roles to federal agencies under a national strategy, it may need to seek consensus on these roles with other levels of government and the private sector. The President's Homeland Security Advisory Council is a step toward achieving that consensus. However, state and local governments are seeking greater input in policymaking. Although state and local governments seek direction from the federal government, according to the National Governors' Association, they oppose mandated participation and prefer broad guidelines or benchmarks. Mandated approaches could stifle state- level innovation and prevent states from serving as testing grounds for new approaches to homeland security. In terms of the private sector, partnerships between it and the public sector are forming, but they are not yet developed to the level of those in Y2K efforts, generally due to the emerging nature of homeland security. Nonetheless, some progress has been made. For example, the North American Electric Reliability Council has partnered with the Federal Bureau of Investigation and the Department of Energy to establish threat levels that they share with utility companies as threats change. Similarly, a Department of Commerce task force is to identify opportunities to partner with private sector entities to enhance security of critical infrastructure. Commonly accepted definitions help provide assurance that organizational, management, and budgetary decisions are made consistently across the organizations involved in a crosscutting effort. For example, they help guide agencies in organizing and allocating resources and can help promote more effective agency and intergovernmental operations by facilitating communication. A definition of homeland security can also help to enforce budget discipline and support more accurate monitoring of homeland security expenditures. The lack of a common definition has hampered the monitoring of expenditures for other crosscutting programs. In our prior work, we reported that the amounts of governmentwide terrorism-related funding and spending were uncertain because, among other reasons, definitions of antiterrorism and counterterrorism varied from agency to agency. On the other hand, the Department of Defense has a draft definition of its own to identify departmental homeland security roles and missions and to support organizational realignments, such as the April 2002 announcement of the establishment of the Northern Command. The department has also required that the services and other organizations use standard terminology when communicating with each other and other federal agencies to ensure a common understanding occurs. However, when the department commented on a draft of this report, it stated that it continues to refine its definition. The department's comments are reprinted in their entirety in Appendix III. Office of Management and Budget officials stated that they also crafted a definition of homeland security to report how much money would be spent for homeland security as shown in the president's fiscal year 2003 budget. These officials acknowledge that their definition is not authoritative and expect the Office of Homeland Security to create a definition before the fiscal year 2004 budget process begins. Officials at other key federal agencies also expect the Office of Homeland Security to craft such a definition. In the interim, the potential exists for an uncoordinated approach to homeland security caused by duplication of efforts or gaps in coverage, misallocation of resources, and inadequate monitoring of expenditures. The Office of Homeland Security faces a task of daunting complexity in unifying the capabilities of a multitude of federal, state, and local governments and private organizations. As shown in our previous reports on combating terrorism, duplication and gaps in coverage can occur when the nation's capabilities are not effectively integrated. Homeland security efforts are not yet focused and coordinated. Some organizations are forging ahead and creating homeland security programs without knowing how these programs will integrate into a national plan while other organizations are waiting for direction from the Office of Homeland Security. Since the Office of Homeland Security plans to address the key issues needing immediate attention--preparing a national strategy, clarifying roles and missions, establishing performance measures, and setting priorities and goals, we are making no recommendations concerning these issues at this time. However, commonly accepted or authoritative definitions of fundamental concepts, such as homeland security, will also be essential to integrate homeland security efforts effectively. Without this degree of definition, communication between participants will lack clarity, coordination of implementation plans will be more difficult, and targeting of resources will be more uncertain. We recommend that the President direct the Office of Homeland Security to develop a comprehensive, governmentwide definition of homeland security, and include the definition in the forthcoming national strategy. We presented a draft of this report to the Office of Homeland Security; the Environmental Protection Agency; the Departments of Agriculture, Commerce, Defense, Energy, Health and Human Services, Justice, Transportation, and Treasury; the Customs Service; and the Federal Emergency Management Agency. Only the Departments of Justice, Defense, Health and Human Services and the Customs Service provided written comments on a draft of this report. The Department of Justice was concerned that the draft report did not discuss several key aspects of its efforts related to ensuring homeland security, noting in particular that we did not note the department's role in the development of the Five-Year Interagency Counterterrorism and Technology Crime Plan. We agree that this plan is an important contribution to homeland security, and we revised our text to recognize the department's efforts in developing the plan. The department's comments and our evaluation of the comments are reprinted in their entirety in appendix II. The Department of Defense stated that the draft portrayed the many challenges facing the departments and agencies as they address homeland security efforts. However, the department pointed out that its definition of homeland security, developed for its own use, was still in draft at the time of our report. We were aware of that and revised our report language to clarify this point. We also incorporated technical corrections as appropriate. The Department of Health and Human Services and the Customs Service provided no overall comments but did provide letters in response to our request for comments, which we have included in appendix IV and V, respectively. The Department of Health and Human Services also provided technical comments, which have been incorporated in the report, as appropriate. We discuss our scope and methodology in detail in appendix I. As agreed with the offices of our congressional requesters, unless they announce the contents of the report earlier, we will not distribute it until 30 days from the date of this letter. At that time, we will send copies of this report to appropriate congressional committees. We will also send a copy to the Assistant to the President for Homeland Security; the Secretaries of Defense, Agriculture, Commerce, Energy, Health and Human Services, Transportation, and the Treasury; the Attorney General; the Director, Federal Bureau of Investigation; the Administrators of the Federal Emergency Management Agency and Environmental Protection Agency; and the Director, Office of Management and Budget. We will make copies available to others upon request. If you or your staff have any questions regarding this report or wish to discuss this matter further, please contact me at (202) 512-6020. Key contributors to this report are listed in appendix VI. To determine the extent to which homeland security efforts represent a unified approach, we interviewed officials and obtained available documents from the Office of Homeland Security, Environmental Protection Agency, Federal Emergency Management Agency, the Federal Bureau of Investigation, the Central Intelligence Agency, and the Departments of Agriculture, Commerce, Defense, Energy, Health and Human Services, Transportation, and the Treasury. We selected these agencies based on their prominent role in the U.S. Government Interagency Domestic Terrorism Concept of Operations Plan and the Federal Response Plan. In addition, we talked to officials from the Office of Management and Budget to discuss budgeting for homeland security. We interviewed officials of the National Governors Association, the National League of Cities, the National Emergency Management Association, the American Red Cross, the Georgia Emergency Management Agency, Gilmore Panel, the Hart-Rudman Commission, the Rand Corporation, the ANSER Institute of Homeland Security, the Center for Strategic and International Studies, the American Bankers Association, the North American Electric Reliability Council, the National Industrial Transportation League, and the Southern Company. We also reviewed year-2000 efforts, our related work on combating terrorism, and Government Performance and Results Act reports we previously issued to identify key elements that support a unified approach to addressing public problems. We did not evaluate the Office of Homeland Security leadership or its efforts to develop the national strategy because it was too early to judge adequately its performance in these areas. Our selection methodology does not permit projection nationwide. We conducted our review from August 2001 through April 2002 in accordance with generally accepted government auditing standards. The following are GAO's comments on the Department of Justice's letter dated May 28, 2002. The Department of Justice was concerned that we did not discuss several key aspects of the department's efforts related to homeland security. Specifically, the department mentioned several plans and roles that it believes should be mentioned in the report. We agree that the plans and roles the department outlines are important and that they play a vital role in homeland security. These plans and efforts along with the many other plans and efforts of local, state and federal governments as well as the private sector--will need to be integrated by the Office of Homeland Security, in its efforts to develop a national homeland security strategy. The department specifically mentions the Five-Year Interagency Counterterrorism and Technology Crime Plan and said that we failed to state that the plan represents a substantial interagency effort and is one document that could serve as a basis for a national strategy--a statement the department points out is contained in a prior GAO report, Combating Terrorism: Selected Challenges and Related Recommendations GAO-01-822 (Washington, D.C.: September 2001). However, in the same report, we also state the plan lacks certain critical elements including a focus on results-oriented outcomes. Moreover, because there is no national strategy that includes all the necessary elements, the Office of Homeland Security is developing an overarching national strategy, which will build on the planning efforts of all participants. The department also stated that we did not reference its role in domestic preparedness. Domestic preparedness and the roles that all participants play in it are important. However, domestic preparedness is only one element of homeland security. As our report points out, our objective was to evaluate the extent to which homeland security efforts to date represent a unified approach. In developing the national strategy, the Office of Homeland Security will address individual agency efforts including those involved in domestic preparedness efforts. The department also noted that we did not cite its efforts regarding the U.S. Government Interagency Domestic Terrorism Concept of Operations Plan. To the contrary, we are very aware of the overall importance of the plan and used it as a basis for selecting the federal agencies that we interviewed. This is discussed in appendix I--scope and methodology. The department furthers cites our failure to acknowledge efforts to improve intelligence sharing. Our objective was to evaluate the extent to which homeland security efforts were unified, and in our discussions, intelligence sharing was repeatedly mentioned as an obstacle to further integration. Despite the department's efforts to improve intelligence sharing as cited in its letter, our work showed that there is a prevailing perception that it continues to be a problem. We do mention, in the section on evolving public and private sector relationships, the intelligence sharing efforts led by the Office of Homeland Security to include the Homeland Security Council and the policy coordination committees. The following are GAO's comments on the Department of Defense's letter. The Department of Defense requested that we more clearly state that it continues to define homeland defense and homeland security and its role in support of homeland security. We agreed and incorporated this information in our report section on the nonexistence of an official governmentwide definition of homeland security. The following are GAO's comments on the Department of Health and Human Services letter dated May 29, 2002. The Department of Health and Human Services had no specific comments on the draft report. However, the Department did provide several technical comments that we incorporated as appropriate. The following are GAO's comments on the Customs' letter dated May 29, 2002. The Customs Service had no specific comments on the draft report. In addition to the contact named above, Lorelei St. James, Patricia Sari- Spear, Kimberly C. Seay, Matthew W. Ullengren, William J. Rigazio, and Susan Woodward made key contributions to this report. Homeland Security: Responsibility and Accountability for Achieving National Goals. (GAO-02-627T, April 11, 2002). National Preparedness: Integration of Federal, State, Local, and Private Sector Efforts Is Critical to an Effective National Strategy for Homeland Security (GAO-02-621T, April 11, 2002). Homeland Security: Progress Made, More Direction and Partnership Sought (GAO-02-490T, March 12, 2002). Homeland Security: Challenges and Strategies in Addressing Short- and Long-Term National Needs (GAO-02-160T, November 7, 2001). Homeland Security: A Risk Management Approach Can Guide Preparedness Efforts (GAO-02-208T, October 31, 2001). Homeland Security: Need to Consider VA's Role in Strengthening Federal Preparedness (GAO-02-145T, October 15, 2001). Homeland Security: Key Elements of a Risk Management Approach (GAO-02-150T, October 12, 2001). Homeland Security: A Framework for Addressing the Nation's Issues (GAO-01-1158T, September 21, 2001). Combating Terrorism: Intergovernmental Cooperation in the Development of a National Strategy to Enhance State and Local Preparedness (GAO-02-550T, April 2, 2002). Combating Terrorism: Enhancing Partnerships Through a National Prearedness Strategy (GAO-02-549T, March 28, 2002). Combating Terrorism: Critical Components of a National Strategy to Enhance State and Local Preparedness (GAO-02-548T, March 25, 2002). Combating Terrorism: Intergovernmental Partnership in a National Strategy to Enhance State and Local Preparedness (GAO-02-547T), March 22, 2002). Combating Terrorism: Key Aspects of a National Strategy to Enhance State and Local Preparedness (GAO-02-473T, March 1, 2002). Combating Terrorism: Considerations For Investing Resources in Chemical and Biological Preparedness (GAO-01-162T, October 17, 2001). Combating Terrorism: Selected Challenges and Related Recommendations (GAO-01-822, September 20, 2001). Combating Terrorism: Actions Needed to Improve DOD's Antiterrorism Program Implementation and Management (GAO-01-909, September 19, 2001). Combating Terrorism: Comments on H.R. 525 to Create a President's Council on Domestic Preparedness (GAO-01-555T, May 9, 2001). Combating Terrorism: Observations on Options to Improve the Federal Response (GAO-01-660T, April 24, 2001). Combating Terrorism: Comments on Counterterrorism Leadership and National Strategy (GAO-01-556T, March 27, 2001). Combating Terrorism: FEMA Continues to Make Progress in Coordinating Preparedness and Response (GAO-01-15, March 20, 2001). Combating Terrorism: Federal Response Teams Provide Varied Capabilities: Opportunities Remain to Improve Coordination (GAO-01- 14, November 30, 2000). Combating Terrorism: Need to Eliminate Duplicate Federal Weapons of Mass Destruction Training (GAO/NSIAD-00-64, March 21, 2000). Combating Terrorism: Observations on the Threat of Chemical and Biological Terrorism (GAO/T-NSIAD-00-50, October 20, 1999). Combating Terrorism: Need for Comprehensive Threat and Risk Assessments of Chemical and Biological Attack (GAO/NSIAD-99-163, September 7, 1999). Combating Terrorism: Observations on Growth in Federal Programs (GAO/T-NSIAD-99-181, June 9, 1999). Combating Terrorism: Analysis of Potential Emergency Response Equipment and Sustainment Costs (GAO-NSIAD-99-151, June 9, 1999). Combating Terrorism: Use of National Guard Response Teams Is Unclear (GAO/NSIAD-99-110, May 21, 1999). Combating Terrorism: Observations on Federal Spending to Combat Terrorism (GAO/T-NSIAD/GGD-99-107, March 11, 1999). Combating Terrorism: Opportunities to Improve Domestic Preparedness Program Focus and Efficiency (GAO-NSIAD-99-3, November 12, 1998). Combating Terrorism: Observations on the Nunn-Lugar-Domenici Domestic Preparedness Program (GAO/T-NSIAD-99-16, October 2, 1998). Combating Terrorism: Threat and Risk Assessments Can Help Prioritize and Target Program Investments (GAO/NSIAD-98-74, April 9, 1998). Combating Terrorism: Spending on Governmentwide Programs Requires Better Management and Coordination (GAO/NSIAD-98-39, December 1, 1997). Bioterrorism: The Centers for Disease Control and Prevention's Role in Public Health Protection (GAO-02-235T, November 15, 2001). Bioterrorism: Review of Public Health and Medical Preparedness (GAO- 02-149T, October 10, 2001). Bioterrorism: Public Health and Medical Preparedness (GAO-02-141T, October 10, 2001). Bioterrorism: Coordination and Preparedness (GAO-02-129T, October 5, 2001). Bioterrorism: Federal Research and Preparedness Activities (GAO-01- 915, September 28, 2001). Chemical and Biological Defense: Improved Risk Assessments and Inventory Management Are Needed (GAO-01-667, September 28, 2001). West Nile Virus Outbreak: Lessons for Public Health Preparedness (GAO/HEHS-00-180, September 11, 2000). Need for Comprehensive Threat and Risk Assessments of Chemical and Biological Attacks (GAO/NSIAD-99-163, September 7, 1999). Chemical and Biological Defense: Program Planning and Evaluation Should Follow Results Act Framework (GAO/NSIAD-99-159, August 16, 1999). Combating Terrorism: Observations on Biological Terrorism and Public Health Initiatives (GAO/T-NSIAD-99-112, March 16, 1999). Disaster Assistance: Improvement Needed in Disaster Declaration Criteria and Eligibility Assurance Procedures (GAO-01-837, August 31, 2001). FEMA and Army Must Be Proactive in Preparing States for Emergencies (GAO-01-850, August 13, 2001). Federal Emergency Management Agency: Status of Achieving Key Outcomes and Addressing Major Management Challenges (GAO-01-832, July 9, 2001). Results-Oriented Budget Practices in Federal Agencies (GAO-01-1084SP, August 2001). Managing for Results: Federal Managers' Views on Key Management Issues Vary Widely Across Agencies (GAO-010592, May 2001). Determining Performance and Accountability Challenges and High Risks (GAO-01-159SP, November 2000). Managing for Results: Using the Results Act to Address Mission Fragmentation and Program Overlap (GAO/AIMD-97-156, August 29, 1997). Government Restructuring: Identifying Potential Duplication in Federal Missions and Approaches (GAO/T--AIMD-95-161, June 7, 1995). Government Reorganization: Issues and Principals (GAO/T-GGD/AIMD- 95-166, May 17, 1995). Grant Programs: Design Features Shape Flexibility, Accountability, and Performance Information (GAO/GGD-98-137, June 22, 1998). Federal Grants: Design Improvements Could Help Federal Resources Go Further (GAO/AIMD-97-7, December 18, 1996). Block Grants: Issues in Designing Accountability Provisions (GAO/AIMD-95-226, September 1, 1995).
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The issue of homeland security crosscuts numerous policy domains, impinging on the expertise and resources of every level of government, the private sector, and the international community. GAO found that although combating terrorism crossed organizational boundaries, it did not sufficiently coordinate the activities of the 40 federal entities involved, resulting in duplication and gaps in coverage. The homeland security efforts of public and private entities do not yet represent a unified approach, although key supporting elements for such an approach are emerging. Progress has been made in developing a framework to support a more unified effort. Other remaining key elements--a national strategy, establishment of public and private sector partnerships, and the definition of key terms--are either not in place yet or are evolving. At the same time, key terms, such as "homeland security," have not been defined officially; consequently, certain organizational, management, and budgetary decisions cannot currently be made across agencies. In the interim, the potential exists for an uncoordinated approach to homeland security that may lead to duplication of efforts or gaps in coverage, misallocation of resources, and inadequate monitoring of expenditures.
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PPACA requires HHS to perform several duties related to CER, including disseminating, training, and building data capacity for research. (See table 1.) Although PPACA did not direct HHS to complete these duties by a specified deadline, it appropriated funds to the Patient-Centered Outcomes Research Trust Fund (PCORTF) through fiscal year 2019 to enable HHS and PCORI to implement their respective requirements. PPACA specified that 20 percent of the amounts appropriated or credited to PCORTF be transferred to the Secretary of HHS in each of fiscal years 2011 through 2019. In total, HHS estimates that about $731 million will be transferred to AHRQ (16 percent of the PCORTF) and about $190 million will be transferred to ASPE (4 percent of the PCORTF). With the exception of the amounts transferred to HHS, PPACA designates the remaining PCORTF funds for PCORI's CER work--an estimated $3.5 billion from fiscal year 2010 through fiscal year 2019. AHRQ has taken some steps to disseminate CER as required under PPACA, including the creation of systematic reviews to develop CER findings, tools to disseminate CER, plans for a website to list and provide links to research databases that include CER, and plans for receiving feedback from stakeholders to whom information is disseminated. However, AHRQ has yet to take other actions that would help it address all PPACA dissemination requirements. AHRQ has taken some steps to implement the law's key requirements for disseminating federally funded CER, that is to (1) broadly disseminate-- develop and distribute--CER in consultation with NIH, (2) create tools that organize and disseminate research findings to certain targeted stakeholder groups, (3) develop a publicly available database, and (4) establish a process for receiving feedback from entities to which information is disseminated. From fiscal year 2012 through 2013, AHRQ has obligated about $37 million of the estimated $731 million it expects to receive through 2019 from the PCORTF on its dissemination activities. Development and distribution of CER findings. AHRQ contributes to the dissemination of CER in various ways, including through the development of systematic reviews, technical briefs, and research summaries that explore the benefits and harms of treatments. In particular, a key method to disseminate CER is through systematic reviews--syntheses of existing research that compare the effectiveness and harms of different healthcare interventions. A systematic review is an assessment and evaluation of all research studies that address a particular clinical issue. Researchers use an organized method of locating, assembling, and evaluating a body of literature on a particular topic. Systematic reviews typically include a description of the findings from the research studies. AHRQ identifies topics for systematic review of CER, such as cardiovascular disease and arthritis, by evaluating topics nominated by individuals or groups against program selection criteria, in order to determine if the topic is appropriate or not appropriate for review. In addition to using its own criteria to identify CER topics for systematic reviews and dissemination, AHRQ documentation states that the agency will consult with experts, such as those from NIH, and review literature to determine whether any similar systematic reviews of relevant studies have already been conducted by other agencies or research organizations in order to reduce potential duplication. Topics selected for a systematic review are further refined with input from key stakeholder groups, technical experts, and patients to develop focused research questions. According to AHRQ officials, research funded by PCORI is not yet included in these systematic reviews because PCORI research is not yet complete. For each systematic review AHRQ synthesizes CER findings from existing research, and the agency disseminates these findings to various targeted stakeholder groups. From June 2012 to June 2014, AHRQ synthesized CER findings through 74 systematic reviews. (See appendix I for a listing of the 74 systematic reviews for which AHRQ disseminated CER findings.) Once a systematic review is complete, AHRQ follows procedures included in its dissemination guidance materials to develop a marketing plan that identifies key messages and targeted stakeholder groups, as well as the types of dissemination mechanisms it will use to conduct outreach. AHRQ officials told us they distribute CER results generally by using the same mechanisms as we previously reported in 2012. These mechanisms include social media, as well as AHRQ's website and AHRQ's Effective Healthcare Program website. According to AHRQ officials, the agency determines which specific mechanisms will be used to disseminate CER results by considering the unique characteristics of the research, such as its type, potential impact, and stakeholder groups most likely to use its findings. For example, CER identified as being of particular interest to specific specialties may be disseminated to certain clinical professional associations. Tools to organize and disseminate CER. AHRQ's marketing plans include various informational tools to disseminate CER. Informational tools include (1) patient decision aids that walk patients through options and choices that patients should consider in working with their clinicians to make informed health care decisions; (2) continuing education and medical education modules to help clinicians understand and use CER findings; (3) slide sets to assist clinicians, researchers and other health professionals with education and training needs; and (4) short, plain- language research summaries that communicate research findings to clinicians, consumers, caregivers, and policymakers. For example, the marketing plan for the systematic review titled, Childhood Exposure to Trauma: Comparative Effectiveness of Interventions Addressing Maltreatment, was developed for a systematic review that examines evidence about interventions for maltreated children. The marketing plan included the specific informational tools to be used to disseminate this project's findings, such as research summaries for clinicians, a summary of treatments for parents and caregivers, a continuing education module for health care providers, and a slide presentation on the topic. They on all CER that has been conducted. National Library of Medicine officials told us that they have informally consulted with AHRQ on its plans and agree with this approach. In November 2014, AHRQ officials told us that they were sharing their planned approach with senior HHS officials for review and approval. Feedback and evaluation process. As required by PPACA, AHRQ officials told us they receive feedback on dissemination efforts and materials from stakeholders, both formally and informally. For example, officials said that for some of their projects, AHRQ convenes focus groups and advisory panels to assess the needs of stakeholder groups and determine how best to disseminate materials. Some stakeholders we spoke to told us that they have provided feedback to AHRQ on materials the agency has disseminated; however, they were uncertain about the extent to which their feedback was incorporated into AHRQ's dissemination efforts. AHRQ conducted a feedback assessment and issued a March 2012 feedback report that highlighted stakeholders perspectives about the agency's disseminated materials. In this report, AHRQ noted that although there is a growing awareness about its disseminated materials, clinicians raised concerns about the timeliness of the information included in the materials, among other things. Officials told us that the agency may conduct future feedback assessments, but they do not know when these will occur and which targeted stakeholder groups will be included. AHRQ also has funded an evaluation to assess its CER dissemination activities and materials supported by the Recovery Act. In September 2013, IMPAQ International--the contractor that conducted the evaluation--issued presentation slides as its final report. The evaluation indicated that stakeholders' exposure to AHRQ's CER information, such as the number of website visits and dissemination materials requested, increased over time with AHRQ's dissemination efforts. The final report also included feedback from certain stakeholder groups through focus groups and surveys. For example, clinicians who participated in focus groups indicated that they typically had little to no experience with the CER information that AHRQ disseminates to clinicians, and suggested that AHRQ more visibly promote the benefits and credibility of this information and then integrate the results and products into existing, easy-to-access sources of medical information focused on point-of-care decision-making. AHRQ officials told us that they plan to award a contract to evaluate the CER dissemination mechanisms--along with the materials they use to share CER findings--that they continued under PPACA. This evaluation project, according to officials, is under development as staff and senior leadership determine the objectives and methods for the study. Although AHRQ staff have not documented their plans as of November 2014, they told us that the evaluation is likely to measure progress on process and intermediate outcome goals of dissemination activities--similar to the last CER evaluation conducted for Recovery Act investments where the agency assessed the level of awareness, understanding, use, and perceived benefits of CER. Officials said the evaluation will also address longer term goals, such as improving health care practice. AHRQ has not taken other actions to help it fully address requirements for disseminating CER in PPACA. Specifically, AHRQ has not taken actions to help it fully address (1) the time frames for disseminating CER, (2) how it will disseminate to all targeted stakeholder groups, (3) its implementation plans for the publicly available database, and (4) how it will coordinate with NIH. Time frames for certain aspects of the dissemination process have not been identified and documented. Although AHRQ has outlined its dissemination process in various documents, it has not clearly identified and documented time frames for one of its key dissemination activities-- to implement marketing plans and distribute associated informational tools. According to GAO's Standards for Internal Control in the Federal Government, significant events need to be clearly documented to ensure management goals are carried out.which together describe the key activities of its dissemination process, including the steps the agency takes to identify key CER findings from systematic reviews, draft and finalize its marketing plans, and distribute its informational tools to the public. While certain AHRQ documents highlight time frames associated with key dissemination activities, we did not identify any documents that specify time frames for when the marketing plans are to be implemented and associated informational tools are to be distributed to stakeholder groups. Once the marketing plans are finalized, the informational tools are to be distributed to targeted stakeholder groups after results of the research have been posted online, such as publication in a major journal. AHRQ officials said they would expect to distribute the informational tools as soon as the results of the AHRQ has several documents research have been posted; however, the dissemination guidance materials we reviewed did not specify time frames for the completion of the implementation of the marketing plans and distribution of informational tools. Without identifying and documenting time frames for these key activities, AHRQ cannot ensure that CER findings are disseminated in a timely manner or that the dissemination process is consistently implemented by all parties. Setting time frames is especially important for dissemination given the length of time and uncertainty inherent in applying CER findings; the large volume of CER research expected from PCORI in the near future, which will increase AHRQ's dissemination responsibilities; and the need to maximize the investment of PCORTF appropriations made through fiscal year 2019. Dissemination plan for some stakeholders identified in PPACA has not been clearly defined. Additionally, AHRQ has not determined how it will disseminate information to certain stakeholder groups identified in law, and its dissemination to some of these groups has been limited. While AHRQ's marketing plans include informational tools aimed at most of the targeted stakeholder groups-- physicians, health care providers, patients, and appropriate professional associations--federal and private health plans, and vendors of health information technology focused on clinical decision support are not included.dissemination to all of the targeted stakeholder groups, AHRQ may be missing opportunities to reach the key stakeholder groups identified in the law. Although as of October 2014 there were no specific marketing plans that identified private or federal health plans to receive disseminated CER information, AHRQ officials told us they have conducted outreach to these groups. For example, we spoke to a representative at a private health plan who confirmed receipt and use of AHRQ disseminated CER materials. For federal health plans, AHRQ officials said that they worked with the Office of Personnel Management, which manages the Federal Employees Health Benefits Program, and this program encouraged health plans to use an AHRQ report on the comparative effectiveness of autism treatments when determining coverage decisions. AHRQ officials noted that some health plans told them that CER information without a corresponding cost analysis is insufficient in informing coverage Without a defined plan for decisions. Officials also told us that AHRQ found challenges translating CER findings into clinical decision support applications; plans are underway to determine next steps. Implementation plans for addressing the requirement to create a publicly available database have not been documented. As of November 2014, AHRQ officials also have not developed and documented a specific implementation plan to create a publicly available database for CER. GAO's Standards for Internal Control in the Federal Government state that management should compare actual performance to plans, and as previously noted, should document significant events. The agency formerly acknowledged its plan to address the PPACA requirement to build a publicly available database during our prior work in 2012,existing databases has not been documented and is in the process of being fully vetted with senior leadership. Additionally, while AHRQ officials told us that their instructions on how to search databases for CER will be aimed at the general public, they have not yet determined how effective these tactics will be to meet the needs of various user groups, such as non-researchers who may be unfamiliar with research databases. For example, officials have not determined if or how they may seek feedback from potential users or test the instructions or search terms to see if they meet potential users' needs. Additionally, AHRQ officials told us they have not determined how to address potential limitations with this new approach. Without taking steps to develop and document an implementation approach that includes time frames and strategies to address potential limitations and AHRQ's plans to assess whether its tactics meet the needs of various users, the agency does not have reasonable assurance that it will implement the PPACA requirement in a timely or effective manner. but AHRQ has since modified this plan, and the new plan to use NIH's consultation role regarding AHRQ's dissemination efforts is unclear. AHRQ is required by law to consult with NIH regarding dissemination efforts, and agency officials told us they meet informally with NIH staff. NIH officials concurred. AHRQ officials said that they have had interactions with NIH on specific dissemination projects of interest to specific NIH institutes or centers, such as the National Cancer Institute. AHRQ and NIH have not determined what role NIH should take in the dissemination process, or which NIH officials should be involved. Previous GAO work has identified key practices that can help federal agencies collaborate effectively when they work together to achieve goals. This work highlighted, for example, the importance of agreeing on roles and responsibilities and establishing compatible policies, procedures, and other means to operate across organizational boundaries. While coordination between the two entities has been informal and limited to specific NIH institutes or centers at this time, AHRQ officials told us that there is a designated AHRQ official that serves as a liaison to NIH to work on this effort. Additionally, AHRQ officials told us that the agency's senior management is currently working with NIH to determine how best to more formally coordinate on AHRQ's dissemination activities, but the officials did not state when this effort will be complete. Without specific plans on how it will collaborate, AHRQ officials lack reasonable assurance that they have buy in from NIH regarding dissemination activities or that their independent efforts are not unnecessarily duplicative. As required by PPACA, AHRQ has implemented a training program aimed at individual researchers and academic institutions that is designed to increase the supply and expertise of CER investigators. Through this program, AHRQ awards grants to support graduate training on CER, career enhancement of beginning and midcareer investigators who utilize CER methods, and institutional CER teaching programs. (See table 2.) AHRQ provides grants to individuals it selects and also to institutions that can select a number of individuals to train on CER. During the planning stages for AHRQ's training program, AHRQ officials told us they consulted with NIH staff members with expertise on the design and management of training grants. An AHRQ official told us that funding will continue for the existing grants awarded to date through 2018. For example, there are currently some training awards that AHRQ will continue to fund through 2018. However, because AHRQ's allocation from the PCORTF is scheduled to end in 2019, AHRQ officials told us that they do not expect to create or initiate additional individual grants. Additionally, AHRQ does not expect that additional funding announcements will be made for the institutional grants, since these grants are on a 5-year cycle with current grants running through 2018. For any grant on a 2-year cycle, there will likely be new awards made, but only up until 2018. In order to monitor the various training grant awards funded since 2012, AHRQ collects progress reports from training grantees on an annual basis. AHRQ officials told us that participants learn about CER methods and apply what they learn to conduct research projects as part of their training. AHRQ requires that grantees annually submit progress reports to assess their performance on these activities. These reports include performance information, such as (1) a description of career development and research-related activities undertaken; (2) a list of accomplishments including publications, scientific presentations, dissemination activities, new collaborations, inventions, or project-generated resources made; (3) any methodological changes implemented; (4) key preliminary findings from research; and (5) an annual evaluation statement of the award recipient's progress by the mentor. AHRQ officials told us that they are considering an interim evaluation of the training grant program for fiscal year 2016 and an overall evaluation after the program is complete in fiscal year 2019. Officials stated that they expect to document specific details about their plans before the evaluations occur, which would be consistent with findings in our prior work that a plan for data collection and evaluation is a key attribute of effective training and development programs and can guide an agency in a systematic approach to assessing effectiveness and efficiency. AHRQ officials emphasized that the training program is ongoing and grantees are not yet expected to have outcomes. For these evaluations, they have collected baseline data from progress reports and they plan to collect additional data once the grant program ends to help inform their evaluations, such as a recipient's promotion and tenure status to measure academic progress. ASPE has coordinated among various agencies to fund projects intended to build data capacity for CER. However, its approach to building data capacity for CER lacks key elements, such as defined objectives, milestones, and time frames, that are necessary to ensure effectiveness. ASPE officials have coordinated and funded projects that they say will help build data capacity for CER. According to ASPE officials, building CER data capacity involves improving data infrastructure, such as facilitating the creation of new health data sets or the sharing of existing health data via the creation of needed standards, services, policies, federal data, and governance structures. ASPE officials say the agency intends these projects to enable interoperable data networks that could support the efficient collection, linkage, and analysis of data for CER from multiple sources. ASPE officials told us that the agency's goal is to identify a number of investment opportunities through fiscal year 2019 for enabling the development of a CER data infrastructure using funds from the PCORTF. Beginning in fiscal year 2013, ASPE officials worked with the Office of the National Coordinator for Health Information Technology (ONC) to develop a strategic road map to guide both the identification and selection of ASPE's PCORTF projects beginning in fiscal year 2014 through fiscal year 2019. The strategic framework for the road map, completed in January 2014, specified five component types--standards, services, policies, federal data, and governance structures--necessary to build CER data capacity. As of October 2014, ASPE has funded a total of 10 projects. (See appendix II for descriptions and funding amounts for the 10 ASPE projects.) ASPE has obligated about $23 million of the total estimated $190 million it expects to receive through FY 2019 from the PCORTF. Prior to the development of the road map, ASPE worked with HHS's Leadership Council, responsible for overseeing ASPE's PCORTF investment process, to identify and fund new projects that utilized the expertise of an HHS agency. Some projects extended the work of existing Recovery Act projects, with the initial projects beginning in 2011. These projects focused on developing new or enhancing existing data resources, such as expanding administrative and clinical data sets for CER and establishing health information technology standards to leverage electronic health records for CER. For example, ASPE funded a new project conducted by ONC known as the Structured Data Capture initiative. For this project, ONC identifies standards for common data elements that consist of structured data definitions and electronic case report forms, to capture patient data from electronic health records for CER studies. ASPE's approach to building data capacity for CER through investments in data infrastructure lacks key elements necessary to ensure its effectiveness. Specifically, ASPE updated the strategic framework for the road map in February 2014, but did not define specific objectives linked with performance metrics or establish milestones and time frames that could be used to gauge its progress toward the goal of coordinating relevant federal health programs to build data capacity, as required by PPACA. Without these key elements, ASPE may be unable to gauge its progress towards meeting the requirements of the law. Standard practices for project management call for agencies to conceptualize, define, and document specific goals and objectives in the planning process, along with the appropriate steps, milestones, time frames, and resources needed to achieve those results. Although the updated February 2014 strategic framework for the road map highlighted a purpose--to identify a set of investment opportunities for developing CER data infrastructure to build CER data capacity--and included guiding principles and objectives, it did not clearly define those objectives, nor did it include other elements such as milestones or time frames that would help allow for monitoring and reporting on progress. Specifically, ASPE identified several guiding principles, such as ensuring that data infrastructure projects are "non-duplicative of other related federal and non-federal investments" and "achieve synergy with PCORI and AHRQ." It also included priority objectives, such as further enabling the collection of standardized clinical data, but many of the objectives were broad and not clearly defined--and did not specify milestones or time frames--as would be consistent with effective project management. Although ASPE identified and considered related, ongoing federal and non-federal data infrastructure investments in an attempt to identify needs or gaps, opportunities where contributions could be made, and ways to avoid duplication, its strategic road map was unclear on the timing and level of coordination necessary for its investments to work together with existing projects--such as PCORI's PCORnet initiative--to improve data capacity. For example, ASPE officials were not clear on how precisely the standards for common data elements resulting from the ONC Standard Data Capture initiative could be incorporated into PCORnet or other existing publicly funded data networks, although ASPE does plan to make them available for use, and officials told us that they will work with other HHS agencies and PCORI to determine adoption strategies. Furthermore, the ONC Standard Data Capture initiative is not expected to be completed until 2016, which occurs after PCORI's common data model for the PCORnet initiative is expected to be used for conducting research, beginning in September 2015. Having more clearly defined objectives and establishing milestones and time frames can also help ASPE assess how it expects the results of its CER investments to build data capacity, and how they will be coordinated in a timeline with many other entities' existing and planned efforts. Moreover, this information can help ASPE officials understand the extent to which their efforts are not duplicative and align with other federal efforts. ASPE officials told us that as of October 2014, they are planning to award a contract for developing an evaluation framework that will be used to assess the effectiveness of their CER data infrastructure projects. They also told us that they monitor and assess the 10 individual projects by collecting quarterly reports and assessing progress against the statements of work that were developed for each project. However, it is unclear from ASPE's strategic road map whether these efforts will be sufficiently timely and coordinated with other federal and non-federal efforts to result in improvements to CER data capacity. Comparative clinical effectiveness research can give health care providers information to help decide which treatments may be most beneficial for a given patient, and it also can inform decisions by patients and caregivers. However, this information is often incomplete or unavailable. While HHS has multiple, ongoing efforts to meet its requirements under PPACA related to CER, it has not determined how it will fully address some of these requirements, particularly those related to dissemination and data capacity building. Disseminating CER in a timely manner is particularly challenging given the length of time and uncertainty inherent in applying research findings to help improve health care practice. AHRQ, for instance, has taken steps to disseminate CER and documented these processes, including time frames for some, but not all, of its key dissemination activities. Such time frames may become especially important due to the large volume of CER research expected from PCORI in the near future, which will increase AHRQ's dissemination responsibilities, and the need to maximize the investment of PCORTF appropriations made through fiscal year 2019. Additionally, effective dissemination of research findings involves multiple stakeholders, some of which are specified in PPACA. Without clear plans to target each of these stakeholder groups, including federal and private health plans and vendors of health information technology focused on clinical decision support, it is unclear whether pertinent CER findings are being directed to key targeted stakeholders identified in PPACA and presented in a meaningful way to those groups. Other aspects of AHRQ's dissemination process, such as its plans for a publicly available database of CER--including whether AHRQ's instructions and CER search terms will be effective to meet the needs of various potential users in the general public--and its collaboration with NIH on dissemination activities, have not been fully defined. HHS's plan to build data capacity involves identifying projects that would enhance existing data resources for CER. While HHS has a strategic road map with information on projects that it is funding to build the capacity for CER data, the road map does not include key elements, such as clearly defined objectives, milestones, and time frames needed to assess the agency's progress toward the goal of building data capacity for CER, as would be consistent with practices for effective project management. Without defining these key elements, for example, it is unclear to what extent ASPE's projects will build on or contribute to other similar federal or non-federal activities, rather than being duplicative. ASPE officials, for instance, could use more defined objectives and time frames to help them better assess the extent to which the CER projects they choose to fund will be useful and timely for other relevant federal and non-federal work, such as PCORI's PCORnet initiative. To help ensure that HHS fully addresses its dissemination requirements under PPACA, we recommend that the Secretary of Health and Human Services direct AHRQ to take the following four actions: 1. identify and document time frames for the implementation and distribution of marketing plans and informational tools; 2. expand dissemination efforts to federal and private health plans and vendors of health information technology focused on clinical decision support; 3. document and complete plans to develop a publicly available database, including plans to meet the needs of various potential users in the general public; and 4. develop specific plans on how it will collaborate with NIH on its dissemination activities. In addition, to ensure that HHS fully addresses the PPACA requirements to build data capacity for CER, the Secretary should direct ASPE to include clearly defined objectives, milestones, and time frames, or other indicators of performance, in its strategic road map that is used to identify its PCORTF projects. We provided a draft of this report to HHS, and HHS provided written comments, which are reprinted in appendix III. HHS concurred with all five of our recommendations and provided additional information about its work to build data capacity for CER. Additionally, HHS provided technical comments, which we incorporated as appropriate. Specifically, for the first four recommendations, HHS--including AHRQ-- stated that it would ensure that starting and ending time frames for the implementation and distribution of patient-centered outcomes research findings are clearly specified and documented. continue and expand dissemination activities that target federal and private health insurance plans, as well as vendors of health information technology focused on clinical decision support. HHS stated that it recently issued a funding opportunity announcement focused on the use of clinical decision support to disseminate and implement patient-centered outcomes research findings. document and complete its plans to ensure that multiple potential users, including the general public, have access to patient-centered outcomes research studies and their findings. As noted in our findings, these plans include creating a web page to list and provide users with links to existing publicly available databases that could be used to search for these studies. Complete plans would include time frames, strategies to address potential limitations, and whether the needs of various users are being met. continue to collaborate with NIH institutes and centers, and develop and document specific collaborations around patient-centered outcomes research dissemination activities. HHS stated that AHRQ has begun regular meetings with NIH--through its Office of Science Policy and the NIH Deputy Director for Science, Outreach, and Policy--to discuss how NIH's and AHRQ's activities can best complement one another. Regarding our last recommendation, HHS stated that it intends, through ASPE, to further develop the road map by specifying milestones with corresponding time frames. HHS will also develop specific performance indicators for its portfolio of data capacity investments. Consistent with our findings and conclusions, HHS's comments also stated that its data capacity investments need to coincide with other key HHS policy initiatives and be responsive to the needs of CER data networks, including PCORI's PCORnet. We are sending copies of this report to the Secretary of Health and Human Services, the Director of AHRQ, the Assistant Secretary for ASPE, and other interested parties. In addition, the report is also available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs are on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. According to the Agency for Healthcare Research and Quality (AHRQ), it conducted 74 systematic reviews--syntheses of existing research--that were related to comparative clinical effectiveness research (CER) and resulted in findings disseminated between June 2012 and June 2014. Table 3 lists each systematic review with dates for each processing step leading up to posting the results of the review on AHRQ's website for the public. Based on GAO's analysis of the 74 systematic reviews, the time frame from when a systematic review began to when the findings were disseminated, including posting via AHRQ's website, ranged from 1 year to more than 4 years. Appendix II: ASPE's Comparative Effectiveness Infrastructure Projects (FY 2011-2014) Amount obligated (dollars in millions) $1.7 a centralized inventory of CER studies to serve as the foundation for a publicly accessible database of current publicly and privately funded CER projects, and related published policy and scientific literature. algorithms to accurately identify and classify CER studies. an improved web-based tool to provide a better understanding of the landscape of current CER activity to users. a mechanism and plan to pilot test the tool prior to making it publicly accessible. Enhancements to the existing database will combine claims data from public and private sources, matching patient information as appropriate, as is necessary for cross-payer and longitudinal analysis. pursue options to test the value of secure distributed data networks for research applications like CER. Ongoing pre-existing project to support CER through a research database that provides researchers with Medicare and Medicaid beneficiary claims and assessment data linked by beneficiary across the continuum of care. Funded enhancements include expanding the amount of Medicaid data available and security enhancements. Collaboration between the Office of the National Coordinator for Health Information Technology and the National Library of Medicine to integrate clinical information and research information within a "template" that can be utilized by researchers. Expand the amount of data collected by a nationwide network of 19 community health centers and five research organizations in 10 states, which together collect CER-related data about patients in underserved communities. Build upon previous Centers for Disease Control and Prevention efforts by augmenting a publicly available dataset for CER with additional longitudinal follow-up data on disease recurrence and vital status for colon, rectum, and breast cancer cases. Enhance software tools and methodology for management and consolidation of electronic data reported on a real-time basis from electronic health records to registries. Identify concrete, strategic opportunities to contribute long term to building data infrastructure for CER, and help maximize the impact of the Patient- Centered Outcomes Research Trust Fund investments. Assess the current landscape of data infrastructure for CER, identify gaps, and opportunities. Develop, select, and validate standards for common data elements for use in CER and a template to collect data from electronic health records for research purposes. Allow providers to access data in their own electronic health records in a standardized way to support CER. Allow researchers outside of the organization who have remote access authorization to access an organization's electronic health record data for the purpose of CER. These projects have two initiatives under the same project description. In addition to the contact named above, Will Simerl, Assistant Director; Jennie Apter; La Sherri Bush; Christine Davis; Ashley Dixon; Colbie Holderness; Andrea Richardson; and Jennifer Whitworth made key contributions to this report.
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PPACA imposed new requirements on HHS related to CER--research that evaluates and compares health outcomes and the clinical effectiveness, risks, and benefits of two or more medical treatments or services. Among other things, PPACA required AHRQ to broadly disseminate findings from federally funded CER and the Secretary of HHS (who, by delegation, charged ASPE) to coordinate federal programs to build data capacity for CER. PPACA also mandated that GAO review HHS's CER activities. This report examines (1) AHRQ's activities to disseminate the results of federally funded CER and (2) ASPE's activities to coordinate federal programs to support CER by building the capacity to collect, link, and analyze data, among other objectives. GAO reviewed relevant legal requirements and HHS documentation; interviewed HHS officials; and obtained information from five stakeholder groups that AHRQ targeted to receive disseminated information or were otherwise involved in AHRQ's dissemination efforts. The Agency for Healthcare Research and Quality (AHRQ), an agency within the Department of Health and Human Services (HHS), has taken some steps to disseminate comparative clinical effectiveness research (CER), as required under the Patient Protection and Affordable Care Act (PPACA), but has not taken other actions to help it fully address its dissemination requirements. The steps it has taken include the creation of tools that organize and disseminate research findings to certain targeted stakeholder groups and the development of plans for a publicly available database that includes CER. For example, AHRQ's marketing plans--customized plans to help convey key messages about AHRQ's research--include various informational tools to disseminate CER, such as research summaries that communicate research findings to clinicians, consumers, caregivers, and policymakers. However, the agency has not clearly defined how to disseminate information to certain stakeholder groups specified in the law, nor has it identified and documented time frames to implement the marketing plans and distribute the associated informational tools, as would be consistent with federal internal control standards, which state that significant events need to be clearly documented to ensure management goals are carried out. Additionally, in order to implement PPACA's requirement for developing a publicly available database that contains CER evidence, AHRQ officials told GAO that they plan to create a web page to list and provide users with links to existing publicly available databases that could be used to search for CER, but they have not documented a specific implementation plan that includes time frames and strategies to address known potential limitations, such as difficulties that certain users may face in searching the databases for CER results. HHS's Assistant Secretary for Planning and Evaluation (ASPE) has coordinated among various agencies to fund projects intended to build data capacity for CER, but its approach lacks key elements needed to ensure its effectiveness. For example, these projects include an effort to better standardize data that could be used in multiple research projects. However, HHS's approach to building data capacity for CER lacks key elements, such as defined objectives, milestones, and time frames, that are necessary to ensure effectiveness. ASPE officials worked with the Office of the National Coordinator for Health Information Technology to develop a strategic road map to guide both the identification and selection of ASPE's projects beginning in fiscal year 2014 through fiscal year 2019. Although the February 2014 strategic framework for the road map highlighted several priority objectives, such as enabling the collection of standardized clinical data, these objectives were broad and not clearly defined. For example, although ASPE identified and considered related, ongoing federal and non-federal data infrastructure projects in an attempt to identify needs or gaps, among other things, its strategic road map is unclear on the timing and level of coordination that would be necessary for its projects to work together with these related projects to improve data capacity. Standard practices for project management call for agencies to conceptualize, define, and document specific goals and objectives in the planning process, along with the appropriate steps, milestones, time frames, and resources needed to achieve those results. GAO recommends that HHS direct (1) AHRQ to take several actions related to its dissemination efforts, including identifying and documenting time frames for the implementation and distribution of marketing plans and informational tools, and (2) ASPE to include clearly defined objectives, milestones, and time frames, or other indicators of performance, in its strategic road map used to identify its CER-funded projects. HHS concurred with the recommendations.
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Because of the importance of the national security space launch enterprise, we have been asked to look at many aspects of the EELV program over the last 10 years. Our work has examined management and oversight for EELV, as well as the "block buy" acquisition approach. The block buy approach, finalized in December 2013, commits the department to an acquisition that spans 5 years, in contrast with the prior practice of acquiring launch vehicles one or two at a time, with the aim of stabilizing the launch industrial base and enabling the government to achieve savings. Additionally, we have assessed the status of the launch vehicle certification process for new entrants. DOD and Congress have taken numerous actions to address our prior recommendations which have resulted in financial and oversight benefits. Highlights of our work over the years follow. We reported that when DOD moved the EELV program from the research and development phase to the sustainment phase in the previous year, DOD eliminated various reporting requirements that would have provided useful oversight to program officials and Congress. For example, the EELV program was no longer required to produce data that could have shed light on the effects the joint venture between Lockheed Martin and Boeing companies (later known as ULA) was having on the program, programmatic cost increases and causes, and other technical vulnerabilities that existed within the program. Furthermore, because the program was now in the sustainment phase, a new independent life-cycle cost estimate was not required for the program; as a result, DOD would not be able to rely on its estimate for making long-term investment planning decisions. According to DOD officials, the life-cycle cost estimate for the program at the time was not realistic. Our recommendations to strengthen oversight reporting gained attention in 2011 following concerns about rising program cost estimates and at that time, Congress required the Secretary of Defense to redesignate the EELV program as a major defense acquisition program, thereby removing it from the sustainment phase and reinstating previous reporting requirements. DOD also developed a new program cost estimate, which allows for greater oversight of the program for both Congress and DOD. We reported that the block buy acquisition approach may be based on incomplete information and although DOD was still gathering data as it finalized the new acquisition strategy, some critical knowledge gaps remained. Specifically, DOD analysis on the health of the U.S. launch industrial base was minimal, and officials continued to rely on contractor data and analyses in lieu of conducting independent analyses. Additionally, some subcontractor data needed to negotiate fair and reasonable prices were lacking, according to Defense Contract Audit Agency reports, and some data requirements were waived in 2007 in exchange for lower prices. DOD also had little insight into the sufficiency or excess of mission assurance activities, which comprise the many steps taken by the government and contractors to ensure launch success. Though the level and cost of mission and quality assurance employed today is sometimes criticized as excessive, it has also resulted in more than 80 consecutive successful launches. We also reported that the expected block buy may commit the government to buy more booster cores than it needs, and could result in a surplus of hardware requiring Further, storage and potentially rework if stored for extended periods.while DOD was gaining insight into the rise in some engine prices, expected at that time to increase dramatically, it was unclear how the knowledge DOD was gaining would inform the expected acquisition approach or subsequent negotiations. We reported that broader issues existed as well, regarding the U.S. Government's acquisition of, and future planning for, launch services-- issues which we recommended be addressed, given that they could reduce launch costs and assure future launch requirements are met. For example, we recommended that federal agencies--like the Air Force, NRO, and NASA--more closely coordinate their acquisitions of launch services. Planning was also needed for technology development focused on the next generation of launch technologies, particularly with respect to engines, for which the United States remains partially reliant on foreign suppliers. Congress responded to our work by legislating that DOD explain how it would address the deficiencies we found. We reported that DOD had numerous efforts underway to address the knowledge gaps and data deficiencies identified in our 2011 report. Of the seven recommendations we made to the Secretary of Defense, two had been completely addressed, four were partially addressed and one had no action taken. That recommendation was aimed at bolstering planning for the next generation of launch technologies. Since GAO's 2011 report, DOD had completed or obtained independent cost estimates for two EELV engines and completed a study of the liquid rocket engine industrial base. Officials from DOD, NASA, and the NRO initiated several assessments to obtain needed information, and worked closely to finalize new launch provider certification criteria for national security space launches. Conversely, we reported that more action was needed to ensure that launch mission assurance activities were not excessive, to identify opportunities to leverage the government's buying power through increased efficiencies in launch acquisitions, and to strategically address longer-term technology investments. We reported on the status of DOD's efforts to certify new entrants for EELV acquisitions.generally satisfied with the Air Force's efforts to implement the process, they identified several challenges to certification, as well as perceived advantages afforded to the incumbent launch provider, ULA. For example, new entrants stated that they faced difficulty in securing enough launch opportunities to become certified. During our review, the Under Secretary of Defense for Acquisition, Technology, and Logistics directed the Air Force to make available up to 14 launches for competition to new entrants, provided they demonstrate the required number of successful launches and provide the associated data in time to compete. Additionally, new entrants considered some Air Force requirements to be overly restrictive; for example, new entrants must be able to launch a minimum of 20,000 pounds to low earth orbit from specific Air Force launch sites (versus facilities the new entrants currently use.) The Air Force stated that 20,000 pounds represents the low end of current EELV lift requirements, and that alternate launch sites are not equipped to While potential new entrants stated that they were support DOD's national security space launches. Further, new entrants noted that the incumbent provider receives ongoing infrastructure and development funding from the government, an advantage not afforded to the new entrants, and that historical criteria for competition in the EELV program were more lenient. The Air Force acknowledged that criteria for competition are different, and reflective of the differences in the current acquisition environment. We reported and testified that DOD's new contract with ULA (sometimes referred to as the "block buy") represented a significant effort on the part of DOD to negotiate better launch prices through its improved knowledge of contractor costs, and that DOD officials expected the new contract to realize significant savings, primarily through stable unit pricing for all launch vehicles. At the time of our review, DOD was leading the broader competition for up to 14 launches, expected to begin in fiscal year 2015. In advance of the upcoming competition, DOD was considering several approaches to how it would require competitive proposals to be structured. Our report did not recommend an approach. However, we identified the pros and cons of two different ends of the spectrum of choices, one being a commercial-like approach and the other being similar to the current approach (a combination of cost-plus and fixed price contracts). If DOD required offers be structured similar to the way DOD currently contracts with ULA, there could be benefits to DOD and ULA as both are familiar with this approach, but potential burdens to new entrants, which would have to change current business practices. Alternatively, if DOD implemented a commercial approach to the proposals, new entrants would potentially benefit from being able to maintain their current efficient business practices, but DOD could lose insight into contractor cost or pricing, as this type of data is not typically required by the Federal Acquisition Regulation under a commercial item acquisition. DOD could also require a combination of elements from each of these approaches, or develop new contract requirements for this competition. ULA's Atlas 5 launch vehicle uses the RD-180 engine produced by the Russian company NPO Energomash. DOD and Congress are currently weighing the need to reduce U.S. reliance on rocket engines produced in Russia and the costs and benefits to produce a similar engine domestically. The RD-180 engine has performed extremely well for some of the nation's most sensitive national security satellites, such as those used for missile warning and protected communications. Moreover, the manufacture process of the RD-180 is one that cannot be easily replicated. In addition, the most effective way to design a launch capability is to design all components in coordination to optimize capabilities needed to meet mission requirements. In other words, replacing the RD-180 could require the development of a new launch vehicle and potentially new launch infrastructure. Space launch vehicle development efforts are high risk from technical, programmatic, and oversight perspectives. The technical risk is inherent. For a variety of reasons, including the environment in which they must operate, a vehicle's technologies and design are complex and there is little to no room for error in the fabrication and integration process. Managing the development process is complex for reasons that go well beyond technology and design. For instance, at the strategic level, because launch vehicle programs can span many years and be very costly, programs often face difficulties securing and sustaining funding commitments and support. At the program level, if the lines of communication between engineers, managers, and senior leaders are not clear, risks that pose significant threats could go unrecognized and unmitigated. If there are pressures to deliver a capability within a short period of time, programs may be incentivized to overlap development and production activities or delete tests, which could result in late discovery of significant technical problems that require more money and ultimately much more time to address. For these reasons, it is imperative that any future development effort adopt disciplined practices and lessons learned from past programs. I would like to highlight a few practices that would especially benefit a launch vehicle development effort. First, decisions on what type of new program to pursue should be made with a government-wide and long-term perspective. Our prior work has shown that defense and civilian government agencies together expect to require significant funding, nearly $44 billion in then-year dollars (that factor in anticipated future inflation), for launch-related activities from fiscal years 2014 through 2018. At the same time, our past work has found that launch acquisitions and activities have not been well coordinated, though DOD and NASA have since made improvements. Concerns have also been raised in various studies about the lack of strategic planning and investment for future launch technologies. Further, the industry is at a crossroads. For example, the government has a decreased requirement for solid rocket motors, yet for strategic reasons some amount of capability needs to be sustained and exercised. The emergence of Space Exploration Technologies, Corp. (SpaceX) and other vendors that can potentially compete for launch acquisitions is another trend that benefits from coordination and planning that takes a government-wide perspective. The bottom line is that any new launch vehicle effort is likely to have effects that reach beyond DOD and the EELV program and should be carefully considered in a long-term, government-wide context. Second, requirements and resources (for example, time, money, and people) need to be matched at program start. This is the first of three key knowledge points we have identified as best practices. In the past, we have found that recent launch programs, such as NASA's Constellation program and Commercial Crew Program, have not had sufficient funding to match demanding requirements. Funding gaps can cause programs to delay or delete important activities and thereby increase risks and can limit the extent to which competition can be sustained. Realistic cost estimates and assessments of technical risk are particularly important at program start. Space programs have historically been optimistic in estimating costs (although recently DOD and NASA have been making strides to produce more realistic estimates). The commitment to more realistic, higher confidence cost estimates would be a great benefit to any new launch vehicle development program and enable Congress to ensure its commitment is based on sound knowledge. We have also found that imposing overly ambitious deadlines can cause an array of problems. For instance, they may force programs to overlap design activities with testing and production. The many setbacks experienced by the Missile Defense Agency's ground-based midcourse defense system, for example, are rooted in schedule pressures that drove concurrent development. Even if the need for a new engine is determined to be compelling, the government is better off allowing adequate time for disciplined engineering processes to be followed. Third, the program itself should adopt knowledge-based practices during execution. The program should also use quantifiable data and demonstrable knowledge to make go/no-go decisions, covering critical facets of the program such as cost, schedule, technology readiness, design readiness, production readiness, and relationships with suppliers. Our work on the second and third knowledge points during execution (design stability and production process maturity) has tied the use of such metrics to improved outcomes. In addition, the program should place a high priority on quality, for example, holding suppliers accountable to deliver high-quality parts for their products through such activities as regular supplier audits and performance evaluations of quality and delivery, among other things. Prior to EELV, DOD experienced a string of launch failures in the 1990s due in large part to quality problems. This concludes my statement. I am happy to answer questions related to our work on EELV and acquisition best practices. For questions about this statement, please contact Cristina Chaplain at (202) 512-4841, or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony were Art Gallegos, Assistant Director; Pete Anderson, Claire Buck, Erin Cohen, Laura Hook, and John Krump. NASA: Actions Needed to Improve Transparency and Assess Long-Term Affordability of Human Exploration Programs. GAO-14-385. Washington, D.C.: May 8, 2014. Missile Defense: Mixed Progress in Achieving Acquisition Goals and Improving Accountability. GAO-14-351. Washington, D.C.: April 1, 2014. Evolved Expendable Launch Vehicle: 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. Defense and Civilian Agencies Request Significant Funding for Launch- Related Activities. GAO-13-802R. Washington, D.C.: September 9, 2013. Space: Launch Services New Entrant Certification Guide. GAO-13-317R. Washington, D.C.: February 7, 2013. 2012 Annual Report: Opportunities to Reduce Duplication, Overlap and Fragmentation, Achieve Savings, and Enhance Revenue. GAO-12-342SP. Washington, D.C.: February 28, 2012. National Aeronautics and Space Administration: Acquisition Approach for Commercial Crew Transportation Includes Good Practices, but Faces Significant Challenges. GAO-12-282. Washington, D.C.: December 15, 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. NASA: Constellation Program Cost and Schedule Will Remain Uncertain Until a Sound Business Case Is Established. GAO-09-844. Washington, D.C.: August 26, 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. 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 EELV program is the primary provider of launch vehicles for U.S. military and intelligence satellites. The DOD expects to spend about $9.5 billion over the next five years acquiring launch hardware and services through the program, during which time it will also be working to certify new launch providers. This investment represents a significant amount of what the entire U.S. government expects to spend on launch activities--including new development, acquisition of launch hardware and services, and operations and maintenance of launch ranges--for the same period. The United Launch Alliance (ULA) is currently the sole provider of launch services through the EELV program. However, DOD, the National Aeronautics and Space Administration (NASA), and the National Reconnaissance Office (NRO) are working to certify new launch providers who can compete with ULA for launch contracts. GAO was asked to discuss past work related to the EELV program, as well as best practices for acquiring new launch capabilities, as the Congress is currently weighing the need to reduce our reliance on rocket engines produced in Russia. GAO has reported extensively on the Evolved Expendable Launch Vehicle (EELV) program in the past. In 2008, GAO reported that when the Department of Defense (DOD) moved the EELV program from the research and development phase to the sustainment phase in the previous year, DOD eliminated various reporting requirements that would have provided useful oversight to program officials and the Congress. In 2011, GAO reported that the block buy acquisition approach may be based on incomplete information and although DOD was still gathering data as it finalized the new acquisition strategy, some critical knowledge gaps remained. In 2012, GAO reported that DOD had numerous efforts under way to address the knowledge gaps and data deficiencies identified in the 2011 GAO report, and found that two of GAO's seven recommendations had been completely addressed, four partially addressed, and one had no action taken. In 2013, GAO reported on the status of DOD's efforts to certify new entrants for EELV acquisitions. While potential new entrants stated that they were generally satisfied with the Air Force's efforts to implement the process, they identified several challenges to certification, as well as perceived advantages afforded to the incumbent launch provider. In 2014, GAO reported and testified that DOD's new contract with ULA (sometimes referred to as the "block buy") represented a significant effort on the part of DOD tonegotiate better launch prices through improved knowledge of contractor costs. DOD officials expect the new contract to realize significant savings, primarily through stable unit pricing for all launch vehicles. Space launch vehicle development efforts are high risk from technical, programmatic, and oversight perspectives. It is imperative that any future development effort adopts disciplined practices and lessons learned from past programs. Practices that would especially benefit a launch vehicle development effort include the following: Decisions on what type of new program to pursue should be made with a government-wide and long-term perspective. Requirements and resources (for example, time, money, and people) need to be matched. The EELV program itself should adopt knowledge-based practices.
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Lead is unusual among drinking water contaminants in that it seldom occurs naturally in source water supplies like rivers and lakes. Rather, lead enters drinking water primarily as a result of the corrosion of materials containing lead in the water distribution system and in household plumbing. These materials include lead service pipes that connect a house to the water main, household lead-based solder used to join copper pipe, and brass plumbing fixtures such as faucets. The Safe Drinking Water Act is the key federal law protecting public water supplies from harmful contaminants. The Act established a federal-state arrangement in which states may be delegated primary implementation and enforcement authority ("primacy") for the drinking water program. Except for Wyoming and the District of Columbia, all states and territories have received primacy. For contaminants that are known or anticipated to occur in public water systems and that the EPA Administrator determines may have an adverse impact on health, the Act requires EPA to set a non- enforceable maximum contaminant level goal (MCLG) at which no known or anticipated adverse health effects occur and that allows an adequate margin of safety. Once the MCLG is established, EPA sets an enforceable standard for water as it leaves the treatment plant, the maximum contaminant level (MCL). The MCL generally must be set as close to the MCLG as is "feasible" using the best technology or other means available, taking costs into consideration. The fact that lead contamination occurs after water leaves the treatment plant has complicated efforts to regulate it in the same way as most contaminants. In 1975, EPA set an interim MCL for lead at 50 parts per billion (ppb), but did not require sampling of tap water to show compliance with the standard. Rather, the standard had to be met at the water system before the water was distributed. The 1986 amendments to the Act directed EPA to issue a new lead regulation, and in 1991, EPA adopted the Lead and Copper Rule. Instead of an MCL, the rule established an "action level" of 15 ppb for lead in drinking water, and required that water systems take steps to limit the corrosiveness of their water. Under the rule, the action level is exceeded if lead levels are higher than 15 ppb in over 10 percent of tap water samples taken. Large systems, including WASA, generally must take at least 100 tap water samples in a 6-month monitoring period. Large systems that do not exceed the action level or that maintain optimal corrosion control for two consecutive 6-month periods may reduce the number of sampling sites to 50 sites and reduce collection frequency to once per year. If a water system exceeds the action level, other regulatory requirements are triggered. The water system must intensify tap water sampling, take additional actions to control corrosion, and educate the public about steps they should take to protect themselves from lead exposure. If the problem is not abated, the water system must annually replace 7 percent of the lead service lines under its ownership. The public notification requirements of the Safe Drinking Water Act are intended to protect public health, build trust with consumers through open and honest sharing of information, and establish an ongoing, positive relationship with the community. While public notification provisions were included in the original Act, concerns have been raised for many years about the way public water systems notify the public regarding health threats posed by contaminated drinking water. In 1992, for example, we reported, among other things, that (1) there were high rates of noncompliance among water systems with the public notification regulations in effect at that time and (2) notices often did not clearly convey the appropriate information to the public concerning the health risks associated with a violation and the preventive action to be taken. The 1996 Amendments to the Safe Drinking Water Act attempted to address many of these concerns by requiring that consumers of public water supplies be given more accurate and timely information about violations and that this information be in a form that is more understandable and useful. Drinking water is provided to District of Columbia residents under a unique organizational structure: The U.S. Army Corps of Engineers' Washington Aqueduct draws water from the Potomac River and filters and chemically treats it to meet EPA specifications. The Aqueduct produces drinking water for approximately 1 million citizens living, working, or visiting in the District of Columbia, Arlington County, Virginia, and the City of Falls Church, Virginia. Managed by the Corps of Engineers' Baltimore District, the Aqueduct is a federally owned and operated public water supply agency that produces an average of 180 million gallons of water per day at two treatment plants located in the District. All funding for operations, maintenance, and capital improvements comes from revenue generated by selling drinking water to the District of Columbia, Arlington County, Virginia, and the City of Falls Church, Virginia. The District of Columbia Water and Sewer Authority buys its drinking water from the Aqueduct. WASA distributes drinking water through 1,300 miles of water mains under the streets of the District to individual homes and buildings, as well as to several federal facilities directly across the Potomac River in Virginia. From its inception in 1938 until 1996, WASA's predecessor, the District of Columbia Water and Sewer Utility Administration, was a part of the District's government. In 1996, WASA was established by District of Columbia law as a semiautonomous regional entity. WASA develops its own budget, which is incorporated into the District's budget and then forwarded to Congress. All funding for operations, improvements, and debt financing come from usage fees, EPA grants, and the sale of revenue bonds. EPA's Philadelphia Regional Office has primary oversight and enforcement responsibility for public water systems in the District. According to EPA, the Regional Office's oversight and enforcement responsibilities include providing technical assistance to the water suppliers on how to comply with federal regulations; ensuring that the suppliers report the monitoring results to EPA by the required deadlines; taking enforcement actions if violations occur; and using those enforcement actions to return the system to compliance in a timely fashion. The District's Department of Health, while having no formal role under the Act, is responsible for identifying health risks and educating the public on those risks. Providing safe drinking water requires that water systems, regulators, and public health agencies fulfill individual responsibilities yet work together in a coordinated fashion. It is particularly important that these entities report and communicate information to each other in a timely and accurate manner. In the case of drinking water in the District of Columbia, one of the key relationships is the one between WASA, the deliverer of water to District customers, and EPA's Philadelphia Office, the regulator charged with overseeing WASA's compliance with drinking water regulations. Of particular note, one of WASA's key obligations is to monitor the water it supplies to District customers through a tap water sampling program, and to report these results accurately and in a timely manner to EPA's Philadelphia Office. As EPA itself has noted, one of the Philadelphia Office's key obligations is to ensure that WASA understands the reporting requirements and reports monitoring results by required deadlines. It is noteworthy that WASA and EPA have taken or agreed to take steps that are clearly intended to improve communication and coordination between the agencies. For example: Under the Consent Order signed by EPA and WASA on June 17, 2004, WASA agreed to improve its format for reporting tap water samples by ensuring that the reports include tap water sample identification numbers, sample date and location, lead and copper concentration, service line materials, and reasons for any deviation from previously sampled locations. The monitoring reports are also to include the laboratory data sheets, which contain the raw test data recorded directly by the laboratory. Under the Order, WASA also agreed to submit to EPA for comment a plan and schedule for enhanced information, database management, and reporting. The plan is to describe how monitoring reports will be generated, maintained, and submitted to EPA in a timely fashion. EPA's Philadelphia Office has altered the way in which it will handle compliance data from WASA and the Washington Aqueduct. According to the office, compliance data from both water systems will now be sent to those in the Office responsible for enforcing the Safe Drinking Water Act, so as to separate the enforcement/compliance assurance function from the municipal assistance function. Aside from the tap water monitoring issue, EPA's Philadelphia Office acknowledges that its oversight of WASA public notification and education efforts could have been better, noting that "In hindsight, EPA should have asked more questions about the extent, coverage and impact of DC WASA's public education program, and reacted to fill the public education gaps where they were evident." To address the problem, the Philadelphia Office reported on its website that it will have to make some improvements in the way it exercises its own oversight responsibilities. Suggested improvements include obtaining written agreement from WASA to receive drafts of education materials and a timeline for their submission, reviewing drafts of public education materials for compliance with requirements, as well as effectiveness of materials and delivery, and acquiring outside expertise to assist in evaluating outreach efforts. As our work continues, we will seek to examine (to the extent it does not conflict with active litigation) other ways in which improved coordination between WASA and EPA could help both agencies better fulfill their responsibilities. We will also examine interrelationships that include other key agencies, such as the Aqueduct and the D.C. Department of Health. We will also examine how other water systems in similar situations interacted with federal, state, and local agencies. These experiences may offer suggestions on how coordination can be improved among the agencies responsible for protecting drinking water in the District of Columbia. WASA is not the first system to exceed the action level for lead. According to EPA, when the first round of monitoring results was completed for large water systems in 1991 pursuant to the Lead and Copper Rule, 130 of the 660 systems serving populations over 50,000 exceeded the action level for lead. EPA data show that since the monitoring period ending in 2000, 27 such systems have exceeded the action level. As part of our work, we will be examining the innovative approaches some of these systems have used to notify and educate their customers. I would like to touch on the activities of two such systems, the Massachusetts Water Resources Authority and the Portland, Oregon, Water Bureau. Each of these systems has employed effective notification practices in recent years that may provide insights into how WASA, and other water systems, could improve their own practices. The Massachusetts Water Resources Authority (MWRA) is the wholesale water provider for approximately 2.3 million customers, mostly in the metropolitan Boston area. Under an agreement with the Massachusetts Department of Environmental Protection, monitoring for lead under the Lead and Copper Rule occurs in each of the communities that MWRA serves and the results are submitted together. Initial system-wide tap water monitoring results in 1992 showed a 90th percentile lead concentration of 71 ppb (meaning 10 percent of its samples scored at this level and above). According to MWRA, adjustments in corrosion control have led to a reduction in lead levels, but the 90th percentile lead concentration in MWRA's service area has still been above the action level in four of the seven sampling events since early 2000. According to an MWRA official, the public education program for lead in drinking water is designed to ensure that all potentially affected parties within MWRA's service area receive information about lead in drinking water. He noted, for example, that while the Lead and Copper Rule requires that information be sent to consumers in their water bills, the large population of renters living in MWRA's service area often do not receive water bills. Therefore, MWRA included information about lead in its consumer confidence report, which is sent to all mailing addresses within the service area. Additionally, MWRA uses public service announcements, interviews on radio and television talk shows, appearances at city councils and other local government agency meetings, and articles in local newspapers to convey information. MWRA also conducted focus groups to judge the effectiveness of the public education program and continually makes changes to refine the information about lead in drinking water. An MWRA official also noted that MWRA focuses portions of its lead public education program on the populations most vulnerable to the health effects of lead exposure. For example, MWRA worked with officials from the Massachusetts Women, Infants and Children Supplemental Nutrition Program (WIC) to design a brochure to help parents understand how to protect their children from lead in drinking water. Among other things, the brochure includes the pertinent information in several foreign languages, including Spanish, Portuguese, and Vietnamese. The WIC program also includes information on how to avoid lead hazards when preparing formula. The Portland Water Bureau provides drinking water to approximately 787,000 people in the Portland metropolitan area, nearly one-fourth of the population of Oregon. Since 1997, the city has exceeded the lead action level 6 times in 14 rounds of monitoring. According to Bureau officials, the problem stems mainly from lead solder used to join copper plumbing and from lead in home faucets. Portland's system has never had lead service lines, and the Water Bureau finished removing all lead fittings within the water system's control in 1998. The Portland Water Bureau sought flexibility in complying with the Lead and Copper Rule. The state of Oregon allowed the Water Bureau to implement a lead hazard reduction program as a substitute for the optimal corrosion control treatment requirement of the Lead and Copper Rule. Portland's lead hazard reduction program is a partnership between the Portland Water Bureau, the Multnomah County and Oregon State health departments, and community groups. According to Portland Water Bureau officials, the program consists of four components: (1) water treatment for corrosion control; (2) free water testing to identify customers who may be at significant risk from elevated lead levels in drinking water; (3) a home lead hazard reduction program to prevent children from being exposed to lead from lead-based paint, dust, and other sources; and (4) education on how to prevent lead exposure targeted to those at greatest risk from exposure. As the components suggest, the program is focused on reducing exposure to lead through all exposure pathways, not just through drinking water. For example, the Water Bureau provides funding to the Multnomah County Health Department's LeadLine--a phone hotline that residents can call to get information about all types of lead hazards. Callers can get information about how to flush their plumbing to reduce their lead exposure and can request a lead sampling kit to determine the lead concentration in the drinking water in their home. The Water Bureau also provides funding for lead education materials provided to new parents in hospitals, for billboards and movie advertisements targeted to neighborhoods with older housing stock, and to the Community Alliance of Tenants to educate renters on potential lead hazards. Each of these materials directs people to call the LeadLine if they need additional information about any lead hazard. The Water Bureau evaluates the results of the program by tracking the number of calls to the LeadLine, and by surveying program participants to determine their satisfaction with the program and the extent to which the program changed their behavior. In January 2004, the Portland Water Bureau sent a targeted mailing to those residents most likely to be affected by lead in drinking water. The mailing targeted homes of an age most likely to contain lead-leaching solder where a child 6 years old or younger lived. Approximately 2,600 postcards were sent that encouraged residents to get their water tested for lead, learn about childhood blood lead screening, and reduce lead hazards in their homes. Water Bureau officials said that they obtained the information needed to target the mailing from a commercial marketing company, and that the commercial information was inexpensive and easy to obtain. In an ideal world, a water utility such as WASA would have several different types of information that would allow it to monitor the health of individuals most susceptible to the health effects of lead in drinking water. The utility would know the location of all lead service lines and homes with leaded plumbing (pipes, solder and/or fixtures) within its service area. The utility would also know the demographics of the residents of each of these homes. With this information, the utility could identify each pregnant woman or child six years old or younger who would be most likely to be exposed to lead through drinking water. These individuals could then be educated about how to avoid lead exposure, and lead exposure for each of these individuals could then be monitored through water testing and blood lead testing. Unfortunately, WASA and other drinking water utilities do not operate in an ideal world. WASA does have some information on the location of lead service lines within its distribution area. Its predecessor developed an inventory of lead service lines in its distribution system in 1990 as part of an effort to identify sampling locations to comply with the Lead and Copper Rule. According to WASA officials, identifying the locations of lead service lines was difficult because many of the records were nearly 100 years old and some of the information was incomplete. According to this 1990 inventory, there were approximately 22,000 lead service lines. WASA updated the inventory in September 2003, and estimated that it had 23,071 "known or suspected" lead service lines. WASA subsequently identified an additional 27,495 service lines in the distribution system made of "unknown" materials. Consequently, there is some uncertainty over the actual number and location of the lead service lines in WASA's distribution system. The administrative order that EPA issued in June 2004 requires WASA to further update its inventory of lead service lines. Regardless of the information WASA has about the location of lead service lines, according to WASA officials, WASA has little information about the location of customers who are particularly vulnerable to the effects of lead. The District's Department of Health is responsible for monitoring blood lead levels for children in the District. Officials from the Department of Health told us that they maintain a database of the results of all childhood blood lead testing in the District, and have studied the distribution of blood lead levels in children on a neighborhood basis. However, according to a joint study by the D.C. Department of Health and the Centers for Disease Control and Prevention (CDC) published in March 2004, it is difficult to discern any effect of lead in drinking water on children's blood lead levels because the older homes most likely to have lead service lines are also those most likely to have other lead hazards, such as lead in paint and dust. This joint study also described efforts by the Department of Health and the United States Public Health Service to conduct blood lead monitoring for residents of homes whose drinking water test indicated a lead concentration greater than 300 ppb. None of the 201 residents tested were found to have blood lead levels exceeding the levels of concern for adults or children, as appropriate. A good deal of research has been conducted on the health effects of lead, in particular on the effects associated with certain pathways of contamination, such as ingestion of leaded paint and inhalation of leaded dust. In contrast, the most relevant studies on the isolated health effects of lead in drinking water date back nearly 20 years--including the Glasgow Duplicate Diet Study on lead levels in children upon which the Lead and Copper Rule is partially based. According to recent medical literature and the public health experts we contacted, the key uncertainties requiring clarification include the incremental effects of lead-contaminated drinking water on people whose blood lead levels are already elevated from other sources of lead contamination and the potential health effects of exposure to low levels of lead. As we continue our work, we will examine the plans of EPA and other organizations to fill these and other key information gaps. Lead is a naturally occurring element that, according to numerous studies, can be harmful to humans when ingested or inhaled, particularly to pregnant and nursing women and children aged six or younger. In children, for example, lead poisoning has been documented as causing brain damage, mental retardation, behavioral problems, anemia, liver and kidney damage, hearing loss, hyperactivity, and other physical and mental problems. Exposure to lead may also be associated with diminished school performance, reduced scores on standardized IQ tests, schizophrenia, and delayed puberty. Long-term exposure may also have serious effects on adults. Lead ingestion accumulates in bones, where it may remain for decades. However, stored lead can be mobilized during pregnancy and passed to the fetus. Other health effects in adults that may be associated with lead exposure include irritability, poor muscle coordination and nerve damage, increased blood pressure, impaired hearing and vision, and reproductive problems. There are many sources of lead exposure besides drinking water, including the ingestion of soil, paint chips and dust; inhalation of lead particles in soil or dust in air; and ingestion of foods that contain lead from soil or water. Extensive literature is available on the health impacts of lead exposure, particularly from contaminated air and dust. CDC identified in a December 2002 Morbidity and Mortality Weekly Report the sources of lead exposure for adults and their potential health effects. In a September 2003 Morbidity and Mortality Weekly Report, CDC identified the most prevalent sources of lead in the environment for children, and correlated high blood lead levels in children with race, sex, and income bracket. The surveys suggest that Hispanic and African-American children are at highest risk for lead poisoning, as well as those individuals who are recipients of Medicaid. Dust and soil contaminated by leaded paint were documented as the major sources of lead exposure. Children and adults living in housing built before 1950 are more likely to be exposed to lead paint and dust and may therefore have higher blood lead levels. Articles in numerous journals have reported on the physical and neurological health effects on children of lead in paint, soil, and dust. The New England Journal of Medicine published an article in April 2003 that associated environmental lead exposure with decreased growth and delayed puberty in girls. In 2000, the Journal of Public Health Medicine examined the implications of lead-contaminated soil, its effect on produce, and its potential health effects on consumers. Lead can also enter children's homes if other residents are employed in lead contaminated workplaces. In 2000, Occupational Medicine found that children of individuals exposed to lead in the workplace were at higher risk for elevated blood lead levels. The EPA has aided in some similar research through the use of its Integrated Exposure Uptake Biokinetic Model for Lead in Children (IEUBK). This model predicts blood lead concentrations for children exposed to different types of lead sources. According to a number of public health experts, drinking water contributes a relatively minor amount to overall lead exposure in comparison to other sources. However, while lead in drinking water is rarely thought to be the sole cause of lead poisoning, it can significantly increase a person's total lead exposure--particularly for infants who drink baby formulas or concentrated juices that are mixed with water from homes with lead service lines or plumbing systems. For children with high levels of lead exposure from paint, soil, and dust, drinking water is thought to contribute a much lower proportion of total exposure. For residents of dwellings with lead solder or lead service lines, however, drinking water could be the primary source of exposure. As exposure declines from sources of lead other than drinking water, such as gasoline and soldered food cans, drinking water will account for a larger proportion of total intake. Thus, according to EPA, the total drinking water contribution to overall lead levels may range from as little as 5 percent to more than 50 percent of a child's total lead exposure. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other Members of this Subcommittee may have at this time. For further information, please contact John B. Stephenson at (202) 512- 3841. Individuals making key contributions to this testimony included Steve Elstein, Samantha Gross, Karen Keegan, Jessica Marfurt, and Tim Minelli. 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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Concerns have been raised about lead in District of Columbia drinking water and how those charged with ensuring the safety of this water have carried out their responsibilities. The 1991 Lead and Copper Rule (LCR) requires water systems to protect drinking water from lead by, among other things, chemically treating it to reduce its corrosiveness and by monitoring tap water samples for evidence of lead corrosion. If enough samples show corrosion, water systems officials are required to notify and educate the public on lead health risks and undertake additional efforts. The Washington Aqueduct, owned and operated by the U.S. Army Corps of Engineers, treats and sells water to the District of Columbia Water and Sewer Authority (WASA), which delivers water to D.C. residents. EPA's Philadelphia Office is charged with overseeing these agencies. GAO is examining (1) the current structure and level of coordination among key government entities that implement the Safe Drinking Water Act's regulations for lead in the District of Columbia, (2) how other drinking water systems conducted public notification and outreach, (3) the availability of data necessary to determine which adult and child populations are at greatest risk of exposure to elevated lead levels, and what information WASA is gathering to help track their health, and (4) the state of research on the health effects of lead exposure. The testimony discusses preliminary results of GAO's work. GAO will report in full at a later date. This statement discusses GAO's preliminary observations and highlights areas of further examination. One of the key relationships in the effort to ensure the safety of the District's drinking water is the one between WASA, the deliverer of water, and EPA's Philadelphia Office, which oversees WASA's compliance with drinking water regulations. Recent public statements and corrective actions by these parties clearly indicate that coordination and communication between them could have been better in the years preceding the current lead controversy. GAO's future work will examine (to the extent appropriate) the interrelationships among other key agencies (such as the Aqueduct and the D.C. Department of Health); how other water systems in similar situations interacted with federal, state, and local agencies; and what the experiences of these other jurisdictions may suggest concerning how improved coordination can better protect drinking water in the District of Columbia. Other water systems facing elevated lead levels used public notification and education practices that may offer lessons for conducting outreach to water customers. For example, some of the practices of the two water systems we have begun to examine--the Massachusetts Water Resources Authority and the Portland (Oregon) Water Bureau--include tailoring their communications to varied audiences in their service areas, testing the effectiveness of their communication materials, and linking demographic and infrastructure data to identify populations at greatest risk from lead in drinking water. WASA faces challenges in collecting the information needed to identify District citizens at greatest risk from lead in drinking water. Specifically, WASA has partial information on which of its customers have lead service lines, and is in the process of obtaining more complete information. GAO's future work will examine the efforts of other water systems to go one step further by linking data on at-risk populations (such as pregnant mothers, infants, and small children) with data on homes suspected of being served by lead service pipes and other plumbing fixtures that may leach lead into drinking water. Nationally, much is known about the hazards of lead once in the body and how lead from paint, soil, and dust enter the body, but little research has been done to determine actual lead exposure from drinking water, and the information that does exist is dated. In our future work, we will examine the plans of EPA and other organizations to fill this key information gap.
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Emissions of heat-trapping greenhouse gases are believed to contribute to global warming. Carbon dioxide, generated both naturally and by the burning of fossil fuels, accounts for the majority of emissions. According to administration representatives, the potential environmental, health, and economic consequences of increasing accumulations of greenhouse gas emissions are serious. For example, according to an Assistant Administrator of the Environmental Protection Agency (EPA), without significantly decreased emissions, over the long term, 15 percent or more of the nation's coastal wetlands could be submerged, the quality of drinking water in certain states could be severely degraded, malaria and other infectious diseases could increase, and severe droughts and floods could increase personal and property damage. In October 1997, the President proposed a three-stage response to climate change, covering a period of 14 years. Stage 1 (1999-2003) is intended to put the nation "on a smooth path" to reducing greenhouse gases through research and development, tax credits for energy-efficient products, and eight other voluntary actions (listed in app. I). During stage 2 (2004-07), the results of stage 1 would be studied, and a system would be designed, and perhaps tested, for awarding and trading permits to emit greenhouse gases. In stage 3 (2008-12), mandatory limits on emissions would be put in place through a market-based domestic and international emissions trading system. Under the Kyoto Protocol, the United States agreed to limit its emissions during the 5-year period 2008 through 2012 to 7 percent below the 1990 emissions level. To achieve this new level, emissions would have to be cut by 31 percent by 2010 (the midpoint of the 5-year period), or the equivalent of about 552 million metric tons of carbon. In February 1998, the administration submitted its budget for fiscal year 1999, including a request to add $6.3 billion over the 5 years of stage 1 to existing funding levels for climate change activities. The majority of this sum ($3.6 billion) was for tax incentives administered by the Department of the Treasury. The balance was designated for the Department of Energy (DOE) ($1.9 billion), EPA ($677 million), the U.S. Department of Agriculture ($86 million), the Department of Commerce ($38 million), and the Department of Housing and Urban Development ($10 million). According to an Office of Management and Budget (OMB) official, that office and seven other government entities will also be involved--the departments of Defense and State, the General Services Administration, the National Science Foundation, the Office of Science and Technology Policy, a White House task force, and the Council of Economic Advisers. In recent years, the Congress has emphasized the need for good planning practices to ensure that federal funds are spent effectively and has directed federal agencies to focus their planning efforts on the results to be achieved. The Government Performance and Results Act of 1993 requires, among other things, that federal agencies set program goals and measure their performance in achieving those goals. In doing this, agencies are to set annual performance goals that have objective, quantifiable, and measurable target levels and that focus on results to the extent possible. In addition, the act implies that federal programs attempting to achieve the same or similar results should be closely coordinated to ensure that goals are consistent and, as appropriate, program efforts are mutually reinforcing. To answer the three questions you asked us, we interviewed officials at DOE, EPA, and Treasury because of their responsibilities for stage 1 actions; we also reviewed budget documents, agencies' strategic and performance plans, and other documents relating to their programs. In addition, we discussed the governmentwide scope of stage 1 efforts with OMB officials. Of the 10 proposed stage 1 actions, we selected 3 for detailed review because of their significant budgeted costs and our past work: (1) tax credits, (2) research and development, and (3) the increased use of energy-efficient products. These three actions account for nearly all of the requested $6.3 billion in additional funding. We did not attempt to determine the reasonableness of the administration's cost estimates. We performed our review from January through June 1998 in accordance with generally accepted government auditing standards. The administration has several broad goals for what it wants to accomplish in stage 1 and a broad plan for accomplishing those goals. However, the administration has not established a quantitative goal for reducing greenhouse gas emissions by the end of stage 1--a primary focus of its initiative. Furthermore, while OMB officials acknowledge that the plan is broad, they have no specific time frame for preparing a more specific plan that would include overall performance goals and measures to meet the spirit of the Government Performance and Results Act. The administration's goals and plan for accomplishing its goals are contained in the President's October 1997 speech, according to OMB's Office of Natural Resources, Energy and Science. There are at least three major goals, according to this office: (1) to spur energy efficiency and encourage the development and deployment of energy sources that produce lower levels of carbon, (2) to provide an immediate incentive for near-term action to reduce greenhouse emissions, and (3) to seek win-win solutions to reduce carbon emissions that can improve energy efficiency and save consumers money. However, the administration has not established a quantitative goal for reducing greenhouse gas emissions by the end of stage 1. According to OMB's Associate Director for Natural Resources, Energy and Science, the administration expects to establish emissions reduction goals for stage 1 but has not yet done so because the effort is so new. He also pointed out that DOE and EPA have performance measures related to their respective activities. He said that OMB expects to continue coordinating and monitoring the efforts of individual agencies. While OMB officials acknowledge that the existing stage 1 plan is broad, they have no specific time frame for preparing a more detailed plan that would include overall performance goals and measures to meet the spirit of the Government Performance and Results Act. We believe a quantitative overall stage 1 goal, and a plan to implement that goal, are desirable primarily because the proposed federal response is extensive--involving 14 federal entities and budgeted to cost $6.3 billion in additional funding. Coordinated program efforts could help ensure that federal funds are used efficiently and could contribute to the overall effectiveness of the federal effort. The extent to which the $6.3 billion stage 1 proposal will help the United States meet the protocol's target for reduced emissions is unclear. The largest investment under the proposal, tax credits, with an estimated cost of about $3.6 billion, has no estimate of the expected benefits and thus is not tied to the protocol's emissions reduction target. The administration has set performance goals for most of the $2.7 billion proposed for research and development and the increased use of energy-efficient products and has estimated potential emissions reductions. However, DOE only recently provided its estimates, while commenting on a draft of this testimony, and we have not analyzed the method or assumptions used to support them. Such an assessment would require a detailed examination of DOE's impact analysis for the technology sectors involved. In addition, EPA's estimates may be overstated. Therefore, it is uncertain how much these activities will help the United States meet the target specified by the protocol. The administration has proposed a package of nine tax credits designed to accelerate the adoption of more energy-efficient technologies. Treasury will be responsible for administering the tax credits, which are estimated to cost $421 million in fiscal year 1999 and a total of $3.6 billion during stage 1. The credits are primarily intended to encourage more energy-efficient buildings, transportation, industrial processes, and electricity generation. However, the administration has not estimated the benefits that would result from the credits. According to the Deputy Assistant Secretary for Tax Analysis, official estimates of the benefits are being prepared but are not yet available. DOE is responsible for implementing most of the research and development activities under the administration's climate change proposal. It plans to increase its spending to $1.06 billion for climate change research and development in fiscal year 1999, a $331 million increase in funding from the 1998 level. The $331 million increase, as well as the remaining $729 million, will continue to support and expand existing research and development programs in energy efficiency and renewable energy, as well as other programs related to climate change. Over the 5-year period, DOE estimates that it will increase spending for climate change research and development by about $1.9 billion. While DOE plans to spend over $1 billion for research and development in fiscal year 1999, the results of that spending are uncertain. Because the research and development efforts address multiple objectives, a senior DOE official told us that the agency's performance goals do not specifically quantify the extent to which these activities could decrease greenhouse gas emissions. These multiple objectives include decreasing U.S. dependence on foreign oil, improving air quality, decreasing energy costs for consumers and businesses, increasing economic competitiveness, and decreasing greenhouse gas emissions, according to departmental officials. However, DOE recently provided us with estimates while commenting on a draft of this testimony. The Department's estimates assume a continuation of its proposed fiscal year 1999 funding of approximately $1.06 billion per year during the 5-year period. DOE estimates reductions in carbon ranging from 31 million to 48 million metric tons by 2005; 87 million to 140 million metric tons by 2010; and 189 million to 338 million metric tons by 2020. Because we received the estimates so recently, we have not analyzed the method or assumptions used to support them. Such an assessment would require a detailed examination of DOE's impact analysis for the technology sectors involved--renewable energy, transportation, industry, buildings, and federal energy use. Nonetheless, we are concerned about the reasons why these estimates have not been expressed as performance goals and measures in DOE's annual performance plan. As such, they would be useful in helping DOE benchmark its progress in this area. Furthermore, in our April 1998 report, we pointed out five common questions the Congress may want to consider before funding DOE's proposed increase for research and development or any research and development: (1) Would the private sector do the research without federal funding? (2) Will consumers buy the product? (3) Do the benefits exceed the costs? (4) Have efforts been coordinated? (5) Have implementation concerns been addressed? In discussing these themes, we cited previous GAO reports--concerning DOE and other agencies--to illustrate these areas. The primary focus of EPA's responsibilities under the climate change initiative is to increase the use of energy-efficient products. As with DOE's research and development activities, EPA's efforts will largely continue and expand ongoing activities. For fiscal year 1999, the agency is proposing to spend about $142 million in that effort; this is an increase of about $77 million over the previous year's $65 million. EPA has specified performance goals for this action. The goals include reducing U.S. energy consumption by over 45-billion kilowatt-hours and reducing emissions by 40-million metric tons of carbon equivalent per year. However, the goals may overstate the potential results of EPA's programs. In a 1997 report on selected voluntary climate change programs, which are now included in EPA's portion of the Climate Change Technology Initiative, we found that, in some cases, EPA did not adjust reported reductions to take account of nonprogram factors that may have contributed to the reported results. For example, for the Green Lights Program (which is intended to encourage businesses and others to install energy-efficient lighting), we found that EPA did not take into account the fact that utility companies' financial incentives and other factors may have induced participants to undertake some energy-saving activities. In commenting on our 1997 report, EPA said it would further study the programs' impact. In commenting on a draft of this statement, an EPA official stated that the results of the further study support EPA's position that it has adequately accounted for nonprogram factors in reporting results. We have not had an opportunity to review the basis for this statement. Because stage 1 lacks a quantitative goal for reducing greenhouse gas emissions, does not have a specific performance plan, and contains incomplete information on expected outcomes and links to the protocol's target, stage 1 may not provide a firm foundation for stages 2 and 3. The success of voluntary efforts in stage 1 would make it easier for the United States to adjust to the mandatory measures envisioned in stage 3 and to achieve the substantial reductions in emissions specified in the Kyoto Protocol. These mandatory measures would be implemented in the third stage (2008-12), when the protocol's target must be reached. There may be penalties for noncompliance if the United States ratifies the protocol but does not reach the target, although the specific penalties have not been agreed upon. The various stage 1 actions are designed to stimulate the development and use of energy-efficient products and technologies, according to administration officials. In so doing, they are meant to improve the nation's energy efficiency, thus reducing greenhouse gas emissions, and to smooth the transition to the mandatory measures that are to be implemented in stage 3. However, because there is no emissions reduction goal and only a broad plan for stage 1, it is not clear how the transition is to be accomplished. A number of factors, including the short time period for achieving the emissions reduction target, make an effectively planned and implemented stage 1 important. First, the United States would be required by the protocol to meet the emissions target during the 5-year period, 2008 through 2012. This time period coincides with stage 3 of the President's proposal. Second, the projected growth in U.S. carbon emissions will make the protocol's target challenging to meet, according to an April 1998 estimate by the Energy Information Administration. Taking into account both the growth expected from 1990 through 2010 and the protocol's target of reducing emissions to 7 percent below the 1990 level, the United States will need to reduce its emissions by 31 percent in 2010. Finally, according to the Department of State, the protocol's targets are binding on nations that enter into the accord, and noncompliance could eventually carry penalties. The parties are to begin discussing procedures for eventually establishing penalties for noncompliance in Buenos Aires in November 1998. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions you may have. The administration has outlined 10 actions in stage 1, listed below: 1. Tax cuts to spur energy efficiency and the development of lower-carbon energy sources. 2. Research and development to accomplish the same goals. 3. Use of energy-efficient products, through a broad-based effort to expand the use of existing energy-efficient technologies. 4. Credit for early action, to provide an immediate incentive for companies to take near-term actions to cut emissions. 5. Industry-by-industry consultations, for key industry sectors to prepare plans for reducing emissions. 6. Focus on federal procurement and energy use as a means to reduce greenhouse gas emissions from federal sources. 7. Electricity restructuring, to change the rules that can impede the introduction of cleaner technologies. 8. The setting of a concentration goal for greenhouse gases in the atmosphere. 9. Bilateral dialogues with key developing countries to promote clean energy. 10. Economics and science reviews. 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: (1) the potential impact of efforts to comply with the Kyoto Protocol; (2) whether the administration has an overall goal for stage 1 and a plan for accomplishing that goal; (2) if funded, to what extent will the $6.3-billion stage 1 climate change proposal help the United States meet the protocol's emissions target; and (3) what the current implications are for the United States if the Senate ratifies the protocol, given the current status of the administration's efforts to implement the climate change proposal. GAO noted that: (1) the administration has several broad goals for what it wants to accomplish in stage 1 and a broad plan for accomplishing them; (2) both the broad goals and plan are contained in the President's October 1997 speech; (3) the administration has not established a quantitative goal for reducing greenhouse gas emissions by the end of stage 1--a primary focus of its initiative; (4) while Office of Management and Budget officials acknowledge that the plan is broad, they have no specific timeframe for preparing a more detailed plan that would include overall performance goals and measures to meet the spirit of the Government Performance and Results Act; (5) the extent to which the $6.3-billion stage 1 proposal will help the United States meet the protocol's target for emission reductions is unclear; (6) the largest investment under the proposal, tax credits, with an estimated cost of about $3.6 billion, has no estimate of the expected benefits and thus is not explicitly tied to the protocol's target for emission reductions; (7) the administration has set performance goals for most of the $2.7 billion proposed for research and development and the increased use of energy-efficient products and has estimated potential emissions reductions; (8) the Department of Energy only recently provided its estimates, while commenting on a draft of this testimony, and GAO has not analyzed them; (9) in addition, the Environmental Protection Agency's estimates may be overstated; (10) therefore, it is uncertain how much these activities will help the United States meet the target specified by the protocol; (11) without an overall goal and plan for stage 1 and complete information on expected outcomes and links to the protocol's emission reduction target, it is uncertain whether stage 1 will effectively lay the foundation for the 31-percent emissions reduction required by the protocol; and (12) although the administration's response to the protocol is relatively recent, a firm foundation in stage 1 is important because the protocol's targets for emission reductions are binding on the nations that agree to the protocol, and penalties for noncompliance with the targets are to be discussed by the parties to the protocol in November 1998.
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According to the Coast Guard, the COP became operational in 2003 and is comprised of four elements: Track data feeds: The primary information included in the Coast Guard's COP is vessel and aircraft position information--or tracks-- and descriptive information about the vessels, their cargo, and crew. Track information may be obtained from a variety of sources depending on the type of track. For example, the COP includes track information or position reports of Coast Guard and port partner vessels. Information data sources: The information data sources provide supplementary information on the vessel tracks to help COP users and operational commanders determine why a track might be important. The COP includes data from multiple information sources that originate from the Coast Guard as well as from other government agencies and civilian sources. Command and control systems: These systems collect, fuse, disseminate, and store information for the COP. Since the COP became operational in 2003, the Coast Guard has provided COP users with various systems that have allowed them to view, manipulate and enhance their use of the COP. These systems have included the Global Command and Control System (GCCS), Command and Control Personal Computer (C2PC), and Hawkeye. In addition to the technology needed to view the COP, the Coast Guard has also developed technology to further enhance the information within the COP and its use to improve mission effectiveness. This has occurred in part through its former Deepwater Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR) program system improvements. COP management procedures: These procedures address the development and the use of the COP. This would include, for example, the Concept of Operations document, which identifies the basic components, use, and exchange of information included in the COP and the requirements document, which identifies the essential capabilities and associated requirements needed to make the COP function. These procedures also include other documents such as standard operating procedures on how the Coast Guard uses the COP, agreements with others using the COP on how information is to be shared or exchanged, and rules for how data are correlated and how vessels are flagged as threats or friends. Figure 1 depicts the Coast Guard's vision of the COP with Coast Guard internal and external users. In April 2013, we reported that since the COP became operational in 2003, the Coast Guard has made progress in adding useful data sources and in increasing the number of users with access to the COP. In general, the COP has added internal and external data sources and types of vessel-tracking information that enhance COP users' knowledge of the maritime domain. Vessel tracking information had been available previously to Coast Guard field units located in ports through a Vessel Tracking Service--that is, a service that provides active monitoring and navigational advice for vessels in confined and busy waterways to help facilitate maritime safety. However, adding it to the COP provided a broader base of situational awareness for Coast Guard operational commanders. For example, before automatic identification system (AIS) vessel-tracking information was added to the COP, only Coast Guard units specifically responsible for vessel-tracking, were able to easily track large commercial vessels' positions, speeds, courses, and destinations. According to Coast Guard personnel, after AIS data were added to the COP in 2003, any Coast Guard unit could access such information to improve strategic and tactical decision making. In 2006, the ability to track the location of Coast Guard assets, including small boats and cutters, was also added to the COP. This capability--also known as blue force tracking--allows COP users to locate Coast Guard vessels in real time and establish which vessels are in the best position to respond to mission needs. Similarly, blue force tracking allows the Coast Guard to differentiate its own vessels from commercial or unfriendly vessels. Another enhancement to the information available in the COP was provided through the updating of certain equipment on Coast Guard assets that enabled them to collect and transmit data. Specifically, the Coast Guard made some data collection and sharing improvements, including the installation of commercial satellite communications equipment and AIS receivers, onboard its older cutters. This added capability made the COP information more robust by allowing Coast Guard vessels at sea to receive, through AIS receivers, position reports from large commercial vessels and then transmit this information to land units where it would be entered into the COP. This equipment upgrade on older Coast Guard cutters added information into the COP that is generally not available through other means. According to Coast Guard officials, in addition to adding information to the COP, the Coast Guard has also made the information contained in the COP available on more computers and on more systems, which, in turn, has increased the number of users with access to the COP. One of the key steps toward increasing the number of users with COP access occurred in 2004 with the implementation of C2PC, which made both the classified and unclassified COP available to additional Coast Guard personnel. According to Coast Guard officials, the advent of C2PC allowed access to the COP from any Coast Guard computer connected to the Coast Guard data network. Prior to C2PC, Coast Guard personnel had access to the COP through Coast Guard GCCS workstations. We previously reported that the Coast Guard has experienced challenges with COP-related technology acquisitions that resulted from the Coast Guard not following its own information technology acquisition guidance and processes. These challenges included poor usability and the inability to share information as intended, and ultimately resulted in the Coast Guard not meeting its goals for multiple COP-related systems. For example, four COP-related systems have been affected by the Coast Guard not closely following its acquisition processes. C4ISR project. The C4ISR project was designed to allow the Coast Guard's newly acquired offshore vessels and aircraft to both add information to the COP using their own sensors as well as view information contained within the COP, thereby allowing these assets to become both producers and consumers of COP information. However, in July 2011, we reported that the Coast Guard had not met its goal of building the $2.5 billion C4ISR system. Specifically, we reported that the Coast Guard had repeatedly changed its strategy for achieving C4ISR's goal of building a single fully interoperable command, control, intelligence, surveillance, and reconnaissance system across the Coast Guard's new vessels and aircraft. Further, we found that not all aircraft and vessels were operating the same C4ISR system, or even at the same classification level, and hence could not directly exchange data with each other. For example, an aircraft operating with a classified system had difficulty sharing information with others operating on unclassified systems during the Deepwater Horizon oil spill incident. In addition, we reported at that time that the Coast Guard may shift away from a full data- sharing capability and instead use a system where shore-based command centers serve as conduits between assets while also entering data from assets into the COP. This approach could increase the time it takes for COP information, for example, gathered by a vessel operating with a classified system to be shared with an aircraft operating with an unclassified system. Because aircraft and vessels are important contributors to and users of COP information, a limited capability to quickly and fully share COP data could affect their mission effectiveness. We concluded that given these uncertainties, the Coast Guard did not have a clear vision of the C4ISR required to meet its missions. We also reported in July 2011 that the Coast Guard was managing the C4ISR program without key acquisition documents. At that time, the Coast Guard lacked an acquisition program baseline that reflected the planned program, a credible life-cycle cost estimate, and an operational requirements document for the entire C4ISR acquisition project. According to Coast Guard information technology officials, the abundance of software baselines could increase the overall instability of the C4ISR system and complexity of the data sharing among assets. We recommended, and the Coast Guard concurred, that it should determine whether the system-of-systems concept for C4ISR is still the planned vision for the program, and if not, ensure that the new vision is comprehensively detailed in the project documentation. In response to our recommendation, the Coast Guard reported in 2012 that it was still supporting the system-of-systems approach, and was developing needed documentation. We will continue to assess the C4ISR program through our ongoing work on Coast Guard recapitalization efforts. Development of WatchKeeper. Another mechanism that was expected to increase access to COP information was the DHS Interagency Operations Center (IOC) program, which was delegated to the Coast Guard for development. This $74 million program began providing COP information to Coast Guard agency partners in 2010 using WatchKeeper software. The IOCs were originally designed to gather data from sensors and port partner sources to provide situational awareness to Coast Guard sector personnel and to Coast Guard partners in state and local law enforcement and port operations, among others. Specifically, WatchKeeper was designed to provide Coast Guard personnel and port partners with access to the same unclassified GIS data, thereby improving collaboration between them and leveraging their respective capabilities in responding to cases. For example, in responding to a distress call, access to WatchKeeper information would allow both the Coast Guard unit and its local port partners to know the location of all possible response vessels, so they could allocate resources and develop search patterns that made the best use of each responding vessel. In February 2012, we reported that the Coast Guard had increased access to its WatchKeeper software by allowing access to the system for Coast Guard port partners. However, the Coast Guard had limited success in improving information sharing between the Coast Guard and local port partners and did not follow its established guidance during the development of WatchKeeper--a major component of the $74 million Interagency Operations Center acquisition project. By not following its guidance, the Coast Guard failed to determine the needs of its users, define acquisition requirements, or determine cost and schedule information. Specifically, prior to the initial deployment of WatchKeeper, the Coast Guard had made limited efforts to determine port partner needs for the system. For example, we found that Coast Guard officials had some high level discussions, primarily with other DHS partners, but that port partner involvement in the development of WatchKeeper requirements was primarily limited to Customs and Border Protection because WatchKeeper had grown out of a system designed for screening commercial vessel arrivals--a Customs and Border Protection mission. However, according to the Interagency Operations Process Report: Mapping Process to Requirements for Interagency Operations Centers, the Coast Guard identified many port partners as critical to IOCs, including other federal agencies (e.g., the Federal Bureau of Investigation) and state and local agencies. We also determined that because few port partners' needs were met with WatchKeeper, use of the system by port partners was limited. Specifically, of the 233 port partners who had access to WatchKeeper for any part of September 2011 (the most recent month for which data were available at the time of our report), about 18 percent had ever logged onto the system and about 3 percent had logged on more than five times. Additionally, we reported that without implementing a documented process to obtain and incorporate port partner feedback into the development of future WatchKeeper requirements, the Coast Guard was at risk of deploying a system that lacked needed capabilities, which would continue to limit the ability of port partners to share information and coordinate in the maritime environment. We concluded, in part, that the weak management of the IOC acquisition project increased the program's exposure to risk. In particular, fundamental requirements-development and management practices had not been employed; costs were unclear; and the project's schedule, which was to guide program execution and promote accountability, had not been reliably derived. Moreover, we reported that with stronger program management, the Coast Guard could reduce the risk that it would have a system that did not meet Coast Guard and port partner user needs and expectations. As a result, we recommended, and the Coast Guard concurred, that it collect data to determine the extent to which (1) sectors are providing port partners with WatchKeeper access and (2) port partners are using WatchKeeper; then develop, document, and implement a process to obtain and incorporate port-partner input into the development of future WatchKeeper requirements; and define, document, and prioritize WatchKeeper requirements. As of April 2013, we had not received any reports of progress on these recommendations from the Coast Guard. Coast Guard Enterprise Geographic Information System (EGIS). In April 2013, we also reported that Coast Guard personnel we interviewed who use EGIS--an important component, along with its associated viewer, for accessing COP information--stated that they had experienced numerous challenges with the system after it was implemented in 2009. Our site visits to area, district, and sector command centers in six Coast Guard field locations, and discussions with headquarters personnel, identified numerous examples of user concerns about EGIS. Specifically, the Coast Guard personnel we interviewed who used EGIS stated that it was slow, did not always display accurate and timely information, or degraded the performance of their computer workstations--making EGIS's performance generally unsatisfactory to them. For example, personnel from one district we visited reported losing critical time when attempting to determine a boater's position on a map display because of EGIS's slow performance. Similarly, personnel at three of the five districts we visited described how EGIS sometimes displayed inaccurate or delayed vessel location information, including, for example, displaying a vessel track indicating a 25-foot Coast Guard boat was located off the coast of Greenland--a location where no such vessel had ever been. Personnel we met with in two districts did not use EGIS at all to display COP information because doing so caused other applications to crash. In addition to user-identified challenges, we reported in April 2013 that Coast Guard information technology (IT) officials told us they had experienced challenges largely related to insufficient computational power on some Coast Guard work stations, a lack of training for users and system installers, and inadequate testing of EGIS software before installation. For example, according to Coast Guard IT officials, Coast Guard computers are replaced on a regular schedule, but not all at once, and EGIS's viewer places a high demand on the graphics capabilities of computers. They added that this demand was beyond the capability of the older Coast Guard computers used in some locations. Moreover, Coast Guard IT management made EGIS available to all potential users without performing the tests needed to determine if capability challenges would ensue. In regard to training, Coast Guard officials told us that they had developed online internal training for EGIS, and classroom training was also available from the software supplier. However, Coast Guard IT officials stated that they did not inform users that this training was available. This left the users with learning how to use EGIS on the job. Similarly, the installers of EGIS software were not trained properly, and many cases of incomplete installation were later discovered. These incomplete installations significantly degraded the capabilities of EGIS. Finally, the Coast Guard did not pre-test the demands of EGIS on Coast Guard systems in real world conditions, according to Coast Guard officials. Tests conducted later, after users commented on their problems using EGIS, demonstrated the limitations of the Coast Guard network in handling EGIS. According to Coast Guard officials, some of these challenges may have been avoided if they had followed established acquisition processes for IT development. If these problems had been averted, users may have had greater satisfaction and the system may have been better utilized for Coast Guard mission needs. Poor communication by, and among, Coast Guard IT officials led to additional management challenges during efforts to implement a simplified EGIS technology called EGIS Silverlight. According to Coast Guard officials, the Coast Guard implemented EGIS Silverlight to give users access to EGIS data without the analysis tools that had been tied to technical challenges with the existing EGIS software. Coast Guard personnel from the Office of the Chief Information Officer (CIO) stated that EGIS Silverlight was available to users in 2010; however, none of the Coast Guard personnel we spoke with at the field units we visited mentioned awareness of or use of this alternative EGIS option when asked about what systems they used to access the COP. According to CIO personnel, it was the responsibility of the system sponsor's office to notify users about the availability of EGIS Silverlight. However, personnel from the sponsor's office stated that they were unaware that EGIS Silverlight had been deployed and thus had not taken steps to notify field personnel of this new application that could have helped to address EGIS performance problems. These Coast Guard officials were unable to explain how this communication breakdown had occurred. Coast Guard One View (CG1V). In April 2013, we reported that the Coast Guard had not followed its own information technology development guidance when developing its new COP viewer, known as Coast Guard One View, or CG1V. The Coast Guard reported that it began development of CG1V in April 2010 to provide users with a single interface for viewing GIS information, including the COP, and to align the Coast Guard's viewer with DHS's new GIS viewer. However, in 2012, during its initial development of CG1V, the agency did not follow its System Development Life Cycle (SDLC) guidance which requires documents to be completed during specific phases of product development. Specifically, 9 months after CG1V had entered into the SDLC the Coast Guard either had not created certain required documents or had created them outside of the sequence prescribed by the SDLC. For example, the SDLC-required tailoring plan is supposed to provide a clear and concise listing of SDLC process requirements throughout the entire system lifecycle, and facilitate the documentation of calculated deviations from standard SDLC activities, products, roles, and responsibilities from the outset of the project. Though the SDLC clearly states that the tailoring plan is a key first step in the SDLC, for CG1V it was not written until after documents required in the second phase were completed. Coast Guard officials stated that this late completion of the tailoring plan occurred because the Coast Guard's Chief Information Officer had allowed the project to start in the second phase of the SDLC because they believed CG1V was a proven concept. However, without key phase one documents, the Coast Guard may have prematurely selected CG1V as a solution without reviewing other viable alternatives to meet its vision, and may have dedicated resources to CG1V without knowing project costs. In October 2012, Coast Guard officials acknowledged the importance of following the SDLC process and stated their intent to complete the SDLC-required documents. Clarifying the application of the SDLC to new technology development would better position the Coast Guard to maximize the usefulness of the COP. In our April 2013 report, we recommended that the Commandant of the Coast Guard direct the Coast Guard Chief Information Officer to issue guidance clarifying the application of the SDLC for the development of future projects. The Coast Guard concurred with the recommendation and reported that it planned to mitigate the risks of potential implementation challenges of future technology developments for the COP by issuing proper guidance and clarifying procedures regarding the applicability of the SDLC. The Coast Guard estimated that it would implement this recommendation by the end of fiscal year 2013. Chairman Hunter, Ranking Member Garamendi, and Members of the Subcommittee, this completes my prepared statement. I would be happy to respond to any questions. For questions about this statement, please contact Stephen L. Caldwell at (202) 512-9610 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 Dawn Hoff (Assistant Director), Jonathan Bachman, Jason Berman, Laurier Fish, Bintou Njie, Jessica Orr, Lerone Reid, 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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To facilitate its mission effectiveness through greater maritime situational awareness, the Coast Guard developed its COP--a map-based information system shared among its commands. The COP displays vessels, information about those vessels, and the environment surrounding them on interactive digital maps. COP information is shared via computer networks throughout the Coast Guard to assist with operational decisions. COP-related systems include systems that can be used to access, or provide information to, the COP. This statement summarizes GAO's work on (1) the Coast Guard's progress in increasing the availability of data sources and COP information to users and (2) the challenges the Coast Guard has experienced in developing and implementing COP-related systems. This statement is based on GAO's prior work issued from July 2011 through April 2013 on various Coast Guard acquisition and implementation efforts related to the COP, along with selected updates conducted in July 2013. To conduct the selected updates, GAO obtained documentation on the Coast Guard's reported status in developing COP-related acquisition planning documents. The Coast Guard, a component of the Department of Homeland Security (DHS), has made progress in developing its Common Operational Picture (COP) by increasing the information in the COP and increasing user access to this information. The Coast Guard has made progress by adding internal and external data sources that allow for better understanding of anything associated with the global maritime domain that could affect the United States. The COP has made information from these sources available to more COP users and decision makers throughout the Coast Guard. For example, in 2006, the ability to track the location of Coast Guard assets, including small boats and cutters, was added to the COP. This capability--also known as blue force tracking--allows COP users to locate Coast Guard vessels in real time and establish which vessels are in the best position to respond to mission needs. In addition to adding information to the COP, the Coast Guard has also made the information contained in the COP available on more computers and on more systems, which, in turn, has increased the number of users with access to the COP. The Coast Guard has also experienced challenges in developing and implementing COP-related systems and meeting the COP's goals for implementing systems to display and share COP information. These challenges have affected the Coast Guard's deployment of recent COP technology acquisitions and are related to such things as the inability to share information as intended and systems not meeting intended objectives. For example, in July 2011, GAO reported that the Coast Guard had not met its goal of building a single, fully interoperable Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance program (C4ISR) system--a $2.5 billion project intended to enable the sharing of COP and other data among its new offshore vessels and aircraft. Specifically, GAO noted that the Coast Guard: (1) repeatedly changed its strategy for achieving the goal of the C4ISR system and (2) that not all vessels and aircraft were operating the same C4ISR system, or even at the same classification level and hence could not directly exchange data with one another as intended. GAO found similar challenges with other Coast Guard COP-related systems not meeting intended objectives. For example, in February 2012, GAO reported that the intended information-sharing capabilities of the Coast Guard's WatchKeeper software--a major part of the $74 million Interagency Operations Center project designed to gather data to help port partner agencies collaborate in the conduct of operations and share information, among other things--met few port agency partner needs, in part because the agency failed to determine these needs when developing the system. Further, in April 2013, GAO reported that, among other things, the Coast Guard experienced challenges when it deployed its Enterprise Geographic Information System (EGIS), a tool for viewing COP information that did not meet user needs. The challenges Coast Guard personnel experienced with EGIS included system slowness and displays of inaccurate information. GAO has made recommendations in prior work to enhance the Coast Guard's development and implementation of its COP-related systems. DHS generally concurred with the recommendations and has reported actions under way to address them.
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Designated uses are the purposes that a state's waters are intended to serve. Some waters, for example, serve as a drinking water source, while others are designated to serve as a source of recreation (swimming or boating) and/or to support aquatic life. The state must also develop water quality criteria, which specify pollutant limits that determine whether a water body's designated use is achieved. These water quality criteria can be expressed, for example, as the maximum allowable concentration of a given pollutant such as iron, or as an important physical or biological characteristic that must be met, such as an allowable temperature range. To develop water quality criteria, states rely heavily on EPA-developed "criteria documents." These documents contain the technical data that allow states to develop the necessary pollutant limits. EPA is responsible for developing and revising criteria documents in a manner that reflects the latest scientific knowledge. States may adopt these criteria as recommended by EPA, adapt them to meet state needs, or develop criteria using other scientifically defensible methods. States are also required to periodically review both their waters' designated uses and associated criteria, and make changes as appropriate. Before those changes can take effect, the state must submit them to EPA and obtain approval for them. EPA is required to review and approve or disapprove standards changes proposed by a state within 60 to 90 days. Figure 1 illustrates how states use water quality standards to make key decisions on which waters should be targeted for cleanup. States generally determine if a water body's designated use is achieved by comparing monitoring data with applicable state water quality criteria. If the water body fails to meet the applicable standards, the state is required to list that water as "impaired"; calculate a pollution budget under EPA's Total Maximum Daily Load program that specifies how compliance with the standard can be achieved; and then eventually implement a cleanup plan. Thus, as noted in 2001 by the National Academy of Sciences' National Research Council, water quality standards are the foundation on which the entire TMDL program rests: if the standards are flawed, all subsequent steps in the TMDL process will be affected. We asked the states to report the total number of designated use changes they adopted from 1997 through 2001. While some states made no use changes, others made over 1,000 changes. At the same time, nearly all states told us that designated use changes are needed. Twenty-eight states reported that between 1 to 20 percent of their water bodies need use changes; 11 states reported that between 21 and 50 percent of their water bodies need use changes; and 5 states reported that over 50 percent of their water bodies need use changes. These percentages suggest that future use changes may dwarf the few thousand made between 1997 and 2001. For example, Missouri's response noted that while the state did not make any use changes from 1997 through 2001, approximately 25 percent of the state's water bodies need changes to their recreational designated uses and more changes might be needed for other use categories as well. Similarly, Oregon's response noted that while the state made no use changes from 1997 through 2001, the state needs designated use changes in over 90 percent of its basins. Many states explained their current need to make designated use changes by noting, among other things, that many of the original use decisions they made during the 1970s were not based on accurate data. For example, Utah's response noted that because of concerns that grant funds would be withheld if designated uses were not assigned quickly, state water quality and wildlife officials set designated uses over a 4- to 5-day period using "best professional judgment." As states have collected more data in ensuing years, the new data have provided compelling evidence that their uses are either under- or over-protective. In addition to changing designated uses for individual waters to reflect the new data, some states are seeking to develop more subcategories of designated uses to make them more precise and reflective of their waters' actual uses. For example, a state may wish to create designated use subcategories that distinguish between cold and warm water fisheries, as opposed to a single, more general fishery use. Developing these subcategories of uses has the potential to result in more protective uses in some cases, and less protective uses in others. According to responses to our survey, a key reason state officials have not made more of the needed designated use changes is the uncertainty many of them face over the circumstances in which use changes are acceptable to EPA and the evidence needed to support these changes. EPA regulations specify that in order to remove a designated use, states must provide a reason as to why a use change is needed and demonstrate to EPA that the current designated use is unattainable. To do this, states are required to conduct a use attainability analysis (UAA). A UAA is a structured, scientific assessment of the factors affecting the attainment of the use, which may include physical, chemical, biological, and economic factors. The results of a state's analysis must be included in its submittal for a use change to EPA. States that want to increase the stringency of a designated use are not required to conduct a UAA. UAAs vary considerably in their scope and complexity and in the time and cost required to complete them. They can range from 15-minute evaluations that are recorded on a single worksheet to more complex analyses that might require years to complete. A Virginia water quality official explained, for example, that some of the state's UAAs are simple exercises using available data, while others require more detailed analysis involving site visits, monitoring, and laboratory work. In their responses to our survey, states reported that the UAAs they conducted in the past 5 years have cost them anywhere from $100 to $300,000. In 1994, EPA published guidance regarding use changes that specifies the reasons states may remove a designated use. Nonetheless, our survey shows that many states are still uncertain about when to conduct UAAs, or about the type or amount of data they need to provide to EPA to justify their proposed use changes. Forty-three percent of states reported that they need additional clarifying UAA guidance. Among them, Oregon's response explained that water quality officials need guidance on whether a UAA is required to add subcategories of use for particular fish species. Virginia's response indicated that the state needs guidance on what reasons can justify recreational use changes, noting further that state water quality officials would like to see examples of UAAs conducted in other states. Louisiana's response similarly called for specific guidance on what type of and how much data are required for UAAs in order for EPA to approve a designated use change with less protective criteria. EPA headquarters and regional officials acknowledge that states are uncertain about how to change their designated uses and believe better guidance would serve to alleviate some of the confusion. Of particular note, officials from 9 of EPA's 10 regional offices told us that states need better guidance on when designated use changes are appropriate and the data needed to justify a use change. Chicago regional officials, for example, explained that the states in their region need clarification on when recreational use changes are appropriate and the data needed to support recreational use changes. In this connection, an official from the San Francisco regional office suggested that headquarters develop a national clearinghouse of approved use changes to provide examples for states and regions of what is considered sufficient justification for a use change. A 2002 EPA draft strategy also recognized that this type of clearinghouse would be useful to the states. The strategy calls on EPA's Office of Science and Technology to conduct a feasibility study to identify ways to provide a cost-effective clearinghouse. According to EPA, the agency plans to conduct the feasibility study in 2004. EPA headquarters officials have also formed a national working group to address the need for guidance. According to the officials, the group plans to develop outreach and support materials addressing nine areas of concern for recreational uses that states have identified as problematic. In addition, the group plans to develop a Web page that includes examples of approved recreational use changes by the end of 2004. The national work groups' efforts may also help address another concern cited by many states--a lack of consistency among EPA's regional offices on how they evaluate proposals by their states to change designated uses. Some states' water quality officials noted in particular that the data needed to justify a use change varies among EPA regions. For example, Rhode Island's response asserted that the state's EPA regional office (Boston) requires a much greater burden of proof than EPA guidance suggests or than other regional offices require. The response said that EPA guidance on UAAs should be more uniformly applied by all EPA regional offices. Several EPA regional officials acknowledged the inconsistency and cited an absence of national guidance as the primary cause. EPA headquarters officials concurred that regional offices often require different types and amounts of data to justify a use change and noted that inconsistency among EPA regional offices' approaches has been a long- standing concern. The officials explained that EPA is trying to reduce inconsistencies while maintaining the flexibility needed to meet region- specific conditions by holding regular work group meetings and conference calls between the regional offices and headquarters. While EPA has developed and published criteria documents for a wide range of pollutants, approximately 50 percent of water quality impairments nationwide concern pollutants for which there are no national numeric water quality criteria. Because water quality criteria are the measures by which states determine if designated uses are being attained, they play a role as important as designated uses in states' decisions regarding the identification and cleanup of impaired waters. If nationally recommended criteria do not exist for key pollutants, or if states have difficulty using or modifying existing criteria, states may not be able to accurately identify water bodies that are not attaining designated uses. Sedimentation is a key pollutant for which numeric water quality criteria need to be developed. In addition, nutrient criteria are currently being developed, and pathogen criteria need to be revised. Together, according to our analysis of EPA data, sediments, nutrients, and pathogens are responsible for about 40 percent of impairments nationwide. (See fig. 2.) Not surprisingly, many states responding to our survey indicated that these pollutants are among those for which numeric criteria are most needed. Recognizing the growing importance of pathogens in accounting for the nation's impaired waters, EPA developed numeric criteria for pathogens in 1986--although states are having difficulty using these criteria and are awaiting additional EPA guidance. EPA is also currently working with states to develop nutrient criteria and has entered into a research phase for sedimentation. EPA explained that the delay in developing and publishing key criteria has been due to various factors, such as the complexity of the criteria and the need for careful scientific analysis, and an essentially flat budget accompanied by a sharply increased workload. EPA also explained that for several decades, the agency and the states focused more on point source discharges of pollution, which can be regulated easily through permits, than on nonpoint sources, which are more difficult to regulate. Even when EPA has developed criteria recommendations, states reported that the criteria cannot always be used because water quality officials sometimes cannot perform the kind of monitoring that the criteria documents specify, particularly in terms of frequency and duration. Our survey asked states about the extent to which they have been able to establish criteria that can be compared with reasonably obtainable monitoring data. About one-third reported that they were able to do so to a "minor" extent or less, about one-third to a "moderate" extent, and about one-third to a "great" extent. Mississippi's response noted, for example, that the state has adopted criteria specifying that samples must be collected on 4 consecutive days. The state noted, however, that its monitoring and assessment resources are simply insufficient to monitor at that frequency. Mississippi is not alone: a 2001 report by the National Research Council found that there is often a "fundamental discrepancy between the criteria used to determine whether a water body is achieving its designated use and the frequency with which water quality data are collected." To address this discrepancy, regional EPA officials have suggested that EPA work with the states to develop alternative methods for determining if water bodies are meeting their criteria, such as a random sampling approach to identify and set priorities for impaired waters. If a state believes that it can improve its criteria, it has the option of modifying them--with EPA's approval. In fact, states are required to review and modify their criteria periodically. A state might modify a criterion, for example, if new information becomes available that better reflects local variations in pollutant chemistry and corresponding biological effects. In response to our survey, 43 states reported that it is "somewhat" to "very" difficult to modify criteria. Not surprisingly, a vast majority of states reported that a lack of resources (including data, funding, and expertise) complicates this task. Nevada's response, for example, explained that, like many states, it typically relies on EPA's recommended criteria because of limited experience in developing criteria as well as limited resources; in many instances, developing site-specific criteria would better reflect unique conditions, allowing for better protection of designated uses. Significantly, however, more than half of the states reported that EPA's approval process serves as a barrier when they try to modify their criteria. In this connection, respondents also noted that EPA's regional offices are inconsistent in the type and amount of data they deem sufficient to justify a criteria change. Some regional officials told us that this inconsistency is explained, in part, by staff turnover in the regional offices. Likewise, a 2000 EPA report found that less tenured staff in some regional offices often lack the technical experience and skill to work with the states in determining the "scientific feasibility" of state-proposed criteria modifications. Our report concluded that additional headquarters guidance and training of its regional water quality standards staff would help facilitate meritorious criteria modifications while protecting against modifications that would result in environmental harm. Because designated uses and criteria constitute states' water quality standards, a change in either is considered a standards modification. We first asked the states whether an improvement in the process of changing designated uses would result in different water bodies being slated for cleanup within their states, and 22 states reported affirmatively. We then asked the states whether an improvement in the process of modifying criteria would result in different water bodies being slated for cleanup within their states, and 22 states reported affirmatively. As figure 3 shows, when we superimposed the states' responses to obtain the cumulative effect of improving either designated uses or the process of criteria modification, a total of 30 states indicated that an improvement in the process of modifying standards (whether a change in their designated uses, their criteria, or both) would result in different water bodies being slated for cleanup. Importantly, the 30-state total does not reflect the impacts that would result from EPA's publication (and states' subsequent adoption) of new criteria for sedimentation and other pollutants, nor does it reflect states' ongoing adoption of nutrient criteria. As these criteria are issued in coming years, states will adopt numeric criteria for these key pollutants, which, in turn, will likely affect which waters the states target for cleanup. To help ensure that both designated uses and water quality criteria serve as a valid basis for decisions on which of the nation's waters should be targeted for cleanup, we recommended that the Administrator of EPA take several actions to strengthen the water quality standards program. To improve designated uses, we recommended that EPA (1) develop additional guidance on designated use changes to better clarify for the states and regional offices when a use change is appropriate, what data are needed to justify the change, and how to establish subcategories of uses and (2) follow through on its plans to assess the feasibility of establishing a clearinghouse of approved designated use changes by 2004. To improve water quality criteria, we recommended that EPA (1) set a time frame for developing and publishing nationally recommended sedimentation criteria, (2) develop alternative, scientifically defensible monitoring strategies that states can use to determine if water bodies are meeting their water quality criteria, and (3) develop guidance and a training strategy that will help EPA regional staff determine the scientific defensibility of proposed criteria modifications. According to officials with EPA's Water Quality Standards Program, the agency agrees with our recommendations, has taken some steps to address them, and is planning additional action. They note that, thus far, EPA staff have already met with a large number of states to identify difficulties the states face when attempting to modify their designated uses. The officials also noted that, among other things, they plan to release support materials to the states regarding designated use changes; develop a Web page that provides examples of approved use changes; and develop a strategy for developing sedimentation criteria by the end of 2003. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other members of the Subcommittee may have at this time. For further information, please contact John B. Stephenson at (202) 512- 3841. Individuals making key contributions to this testimony included Steve Elstein and Barbara Patterson. Other contributors included Leah DeWolf, Laura Gatz, Emmy Rhine, Katheryn Summers, and Michelle K. Treistman. 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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Water quality standards comprise designated uses and water quality criteria. These standards are critical in making accurate, scientifically based determinations about which of the nation's waters are most in need of cleanup. GAO examined the extent to which (1) states are changing designated uses when necessary, (2) EPA is assisting states toward that end, (3) EPA is updating the "criteria documents" states use to develop the pollutant limits needed to measure whether designated uses are being attained, and (4) EPA is assisting states in establishing criteria that can be compared with reasonably obtainable monitoring data. The extent to which states are changing designated uses varies considerably. Individual states made anywhere from no use changes to over 1,000 use changes during the 5-year period, from 1997 through 2001. Regardless of the number of use changes states made, nearly all states report that some water bodies within their states currently need changes to their designated uses. To do so, many states said they need additional EPA assistance to clarify the circumstances in which use changes are acceptable to EPA and the evidence needed to support those changes. While EPA has developed and published criteria for a wide range of pollutants, the agency has not updated its criteria documents to include sedimentation and other key pollutants that are causing approximately 50 percent of water quality impairments nationwide. In addition to needing new criteria documents, states need assistance from EPA in establishing criteria so that they can be compared with reasonably obtainable monitoring data. Changing either designated uses or criteria is considered a standards modification. Twenty-two states reported that an improvement in the process for changing designated uses would result in different water bodies being slated for cleanup; 22 states also reported that an improvement in the process for modifying criteria would have that effect. Collectively, 30 states would have different water bodies slated for cleanup with an improvement in the process of modifying standards.
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Since 2005, there have been several efforts to inventory federal STEM education programs and reports that call for the need to better coordinate and evaluate STEM education programs. In 2005, for example, GAO identified a multitude of agencies that administer such programs. The primary missions of these agencies vary, but most often, they are to promote and enhance an area that is related to a STEM field or enhance general education. In addition, the National Science and Technology Council (NSTC) was established in 1993 and is the principal means for the administration to coordinate science and technology with the federal government's larger research and development effort. The America COMPETES Reauthorization Act of 2010 sought to address coordination and oversight issues, including those associated with the coordination and potential duplication of federal STEM education efforts.the law required the Director of the Office for Science and Technology Policy (OSTP) to establish a committee under the NSTC to inventory, review, and coordinate federal STEM education programs. The law also directed this NSTC committee to develop a 5-year governmentwide STEM education strategic plan, which must specify and prioritize annual and long-term objectives for STEM education. Moreover, the Director of OSTP is required to send a report to Congress annually on this strategic plan, which must include, among other things, an evaluation of the levels of duplication and fragmentation of STEM programs and activities. In our January 2012 report on STEM education, we defined a federally funded STEM education program as a program funded in fiscal year 2010 by congressional appropriation or allocation that included one or more of the following as a primary objective: attract or prepare students to pursue classes or coursework in STEM areas through formal or informal education activities, attract students to pursue degrees (2-year, 4-year, graduate, or doctoral degrees) in STEM fields through formal or informal education activities, provide training opportunities for undergraduate or graduate students attract graduates to pursue careers in STEM fields, improve teacher (preservice or in-service) education in STEM areas, improve or expand the capacity of K-12 schools or postsecondary institutions to promote or foster education in STEM fields, or conduct research to enhance the quality of STEM education programs provided to students. In addition, a program was defined as an organized set of activities supported by a congressional appropriation or allocation. Further, we defined a program as a single program even when its funds were allocated to other programs as well. We asked agency officials to provide a list of programs that received funds in fiscal year 2010. In our January 2012 report, we examined the extent to which federal STEM education programs were fragmented, overlapping, and duplicative. overlap, and duplication work, key terms were defined as follows: Using our framework established in previous fragmentation, Fragmentation occurs when more than one federal agency (or more than one organization within an agency) is involved in the same broad area of national need. Overlap occurs when multiple programs offer similar services to similar target groups in similar STEM fields to achieve similar objectives. Duplication occurs when multiple programs offer the same services to the same target beneficiaries in the same STEM fields. GAO-12-108. As we reported in 2012, 13 agencies administered 209 STEM education programs in fiscal year 2010. Agencies reported that they developed the majority (130) of these programs through their general statutory authority and that Congress specifically directed agencies to create 59 of these programs. The number of programs each agency administered ranged from 3 to 46 with three agencies--the Department of Health and Human Services, the Department of Energy, and the National Science Foundation (NSF)--administering more than half of all programs--112 of 209. (See fig. 1) Agencies obligated over $3 billion to STEM education programs in fiscal year 2010, ranging from $15,000 to hundreds of millions of dollars per program. NSF and the Department of Education programs accounted for over half of this funding. Almost a third of the programs had obligations of $1 million or less, with five programs having obligations of more than $100 million each. Beyond the 209 programs identified in our review, federal agencies carried out other activities that contribute to the overall federal STEM education effort. Having multiple agencies, with varying expertise, involved in delivering STEM education has both advantages and disadvantages. On the one hand, it could allow agencies to tailor programs to suit their specific missions and needs to attract new employees to their workforce. On the other hand, it could make it challenging to develop a coherent federal approach to educating STEM students and creating a workforce with STEM skills. Further, it could make it difficult to identify gaps and allocate resources across the federal government. As we reported in 2012, and as figure 2 illustrates, in fiscal year 2010, 83 percent of STEM education programs overlapped to some degree with another program in that they offered at least one similar service to at least one similar target group in at least one similar STEM field to achieve at least one similar objective. These programs ranged from being narrowly focused on a specific group or field of study to offering a range of services to students and teachers across STEM fields. This complicated patchwork of overlapping programs has largely resulted from federal efforts to both create and expand programs across many agencies in an effort to improve STEM education and increase the number of students going into STEM fields. Program officials reported that approximately one-third of STEM education programs funded in fiscal year 2010 were first funded between 2005 and 2010. We believe the creation of new programs during that time frame may have contributed to overlap and, ultimately, to inefficiencies in how STEM programs across the federal government are focused and delivered. Overlap among STEM education programs is not new. In 2007, the Academic Competitiveness Council (ACC) identified extensive overlap among STEM education programs, and, in 2009, we identified overlap among teacher quality programs, which include several programs focused on STEM education. Overlapping programs can lead to individuals and institutions being eligible for similar services in similar STEM fields offered through multiple programs and, without information sharing, could lead to the same service being provided to the same individual or institution. Our analysis found that many programs provided services to similar target groups, such as K-12 students, postsecondary students, K-12 teachers, and college faculty and staff. The vast majority of programs (170) served postsecondary students. Ninety-five programs served college faculty and staff, 75 programs served K-12 students, and 70 programs served K-12 teachers. In addition, many programs served multiple target groups. In fact, 177 programs primarily served two or more target groups. We also found many STEM programs providing similar services. To support students, 167 different programs provided research opportunities, internships, mentorships, or career guidance. In addition, 144 programs provided short-term experiential learning opportunities and 127 long-term experiential learning opportunities. Short-term experiential learning activities included field trips, guest speakers, workshops, and summer camps. Long-term experiential learning activities last a semester in length or longer. Furthermore, 137 programs provided outreach and recognition to generate student interest, 124 provided classroom instruction, and 75 provided student scholarships or fellowships. To support teachers, 115 programs provided curriculum development, 83 programs provided teacher in-service, professional development, or retention activities, and 52 programs provided preservice or recruitment activities. To support STEM research, 68 programs reported conducting research to enhance the quality of STEM education. To support institutions, 65 programs provided institutional support to management and administrative activities, and 46 programs provided support for expanding the facilities, classrooms, and other physical infrastructure of institutions. In addition to serving multiple target groups, our analysis found that most programs also provided services in multiple STEM fields. Twenty-three programs targeted one specific STEM field, while 121 programs targeted four or more specific STEM fields. In addition, 26 programs indicated not focusing on any specific STEM field, and instead provided services eligible for use in any STEM field. Five different STEM fields had over 100 programs that provided services. Biological sciences and technology were the most selected STEM fields that programs focused on. Agricultural sciences, which was the least commonly selected, still had 27 programs that provided services specifically to that STEM field. While our 2011 survey data also show that many programs overlapped, it is important to compare programs' target groups and STEM fields of focus to get a better picture of the potential target beneficiaries that could be served within a given STEM discipline. For example, both the National Oceanic and Atmospheric Administration's National Environmental Satellite, Data, and Information Service (NESDIS) Education program and the Department of Energy's Graduate Automotive Technology Education program provided scholarships or fellowships to postsecondary students, but NEDSIS focused on students in earth sciences programs, and the other on engineering; therefore, the target beneficiaries served by these two similar programs are quite different. Nevertheless, we found that 76 programs served postsecondary students in physics. As table 1 illustrates, many programs offered services to similar target groups in similar STEM fields of focus. We also found that many STEM education programs had similar objectives. In response to our 2011 survey, the vast majority (87 percent) of STEM education program officials indicated that attracting and preparing students throughout their academic careers in STEM areas was a primary objective. In addition to attracting and preparing students throughout their academic careers in STEM areas, officials also indicated the following primary program objectives: improving teacher education in STEM areas (teacher development)-- 26 percent, improving or expanding the capacity of K-12 schools or postsecondary institutions to promote or foster education in STEM fields (institution capacity building)--24 percent, and conducting research to enhance the quality of STEM education provided to students (STEM education research)--18 percent. Many programs also reported having multiple primary objectives. While 107 programs focused solely on student education, 82 others indicated having multiple primary objectives, and 9 programs reported having 4 or more primary objectives. Few programs reported focusing solely on teacher development, institution capacity building, or STEM education research. Most of these objectives were part of a larger program that also focused on attracting and preparing students in STEM education. However, even when programs overlapped, we found that the services they provided and the populations they served may differ in meaningful ways and would therefore not necessarily be duplicative. There may be important differences between the specific field(s) of focus and a program's stated goals. For example, both Commerce's National Estuarine Research Reserve System Education Program and the Nuclear Regulatory Commission's Integrated University Program provided scholarships or fellowships to doctoral students in the field of physics; however, the Commerce program focuses on increasing environmental literacy related to estuaries and coastal watersheds, while the Nuclear Regulatory Commission program focuses on supporting education in nuclear science, engineering, and related fields with the goal of developing a workforce capable of designing, constructing, operating, and regulating nuclear facilities and capable of handling nuclear materials safely. In addition, programs may be primarily intended to serve different specific populations within a given target group. For example, of the 34 programs that we surveyed in 2011 that provided services to K-12 students in the field of technology, 10 were primarily intended to serve specific underrepresented, minority, or disadvantaged groups, and 2 were limited geographically to individual cities or universities. Furthermore, individuals may receive assistance from different programs at different points throughout their academic careers that provide services that complement or build upon each other, simultaneously supporting a common goal rather than serving cross purposes. In 2012, we reported that in addition to the fragmented and overlapping nature of federal STEM education programs, agencies' limited use of performance measures and evaluations may hamper their ability to assess the effectiveness of their individual programs as well as the overall STEM education effort. Understanding program performance and effectiveness is key in determining where to strategically invest limited federal funds to achieve the greatest impact in developing a pipeline of future workers in STEM fields. Program officials varied in their ability to provide reliable output measures--for example, the number of students, teachers, or institutions directly served by their program. In some cases, the program's agency did not maintain databases or contracts that would track the number of students served by the program. In other cases, programs may not have been able to provide information on the numbers of institutions they served because they provided grants to secondary recipients. In 2012, we reported that the inconsistent collection of output measures across programs makes it challenging to aggregate the number of students, teachers, and institutions served and to assess the effectiveness of the overall federal effort. In addition, most agencies did not use outcome measures in a way that is clearly reflected in their performance plans and reports--publicly available documents they use for performance planning. These documents typically lay out agency performance goals that establish the level of performance to be achieved by program activities during a given fiscal year, the measures developed to track progress, and what progress has been made toward meeting those performance goals. The lack of performance outcome measures may hinder decision makers' ability to assess how agencies' STEM education efforts contribute to agencywide performance goals and the overall federal STEM effort. For our 2012 report, we reviewed fiscal year 2010 annual performance plans and reports of the 13 agencies with STEM programs and found that most agencies did not connect STEM education activities to agency goals or measure and report on the progress of those activities. We define "evaluation" as an individual systematic study conducted periodically or on an ad hoc basis to assess how well a program is working, typically relative to its program objectives. In our January 2012 report, we made four recommendations to the Director of OSTP to direct the NSTC to: 1. Work with agencies, through its strategic-planning process, to identify programs that might be candidates for consolidation or elimination, which could be identified through an analysis that includes information on program overlap and program effectiveness. As part of this effort, OSTP should work with agency officials to identify and report any changes in statutory authority necessary to execute each specific program consolidation identified by NSTC's strategic plan. 2. Develop guidance to help agencies determine the types of evaluations that may be feasible and appropriate for different types of STEM education programs and develop a mechanism for sharing this information across agencies. This step could include guidance and sharing of information that outlines practices for evaluating similar types of programs. 3. Develop guidance for how agencies can better incorporate each agency's STEM education efforts and the goals from NSTC's 5-year STEM education strategic plan into each agency's own performance plans and reports. 4. Develop a framework for how agencies will be monitored to ensure that they are collecting and reporting on NSTC strategic plan goals. This framework should include alternatives for a sustained focus on monitoring coordination of STEM programs if the NSTC Committee on STEM terminates in 2015 as called for in its charter. OSTP agreed with our conclusions and, as figure 4 shows, NSTC has made some progress in addressing recommendations from our January 2012 report. Subsequently, OSTP has stated that NSTC's 5-Year Federal STEM Education Strategic Plan, originally scheduled to be released in spring 2012, would address our recommendations; however, the release of NSTC's Strategic Plan has been delayed. In February 2012, NSTC published Coordinating Federal Science, Technology, Engineering, and Mathematics (STEM) Education Investments: Progress Report, which identified a number of programs that could be eliminated in fiscal year 2013. By identifying programs for consolidation, elimination, and other actions, the administration could increase the efficient use of scarce government resources to achieve the greatest impact in developing a pipeline of future workers in STEM fields. Although NSTC said it planned to create a small working group to develop guidance on the appropriateness of different types of evaluations for different types of STEM education programs, OSTP has not released the findings of this working group. Agency and program officials would benefit from guidance and information sharing within and across agencies about what is working and how to best evaluate programs. This could help improve individual program performance and also inform agency and governmentwide decisions about which programs should continue to be funded. We continue to believe that without an understanding of what is working in some programs, it will be difficult to develop a clear strategy for how to spend limited federal funds. In addition, STEM education was named as an interim crosscutting priority goal in the President's 2013 budget submission; however, it will be important for NSTC to finalize its strategic plan, which should include guidance for how agencies can better align their performance plans and reports to new governmentwide goals. Although OSTP agreed to develop milestones and metrics to track the implementation of NSTC strategic goals by each agency, it has not taken action to develop a framework for how agencies will be monitored to ensure that they are collecting and reporting on NSTC strategic plan goals. A framework for monitoring agency progress towards NSTC's strategic plan is necessary to improve transparency and strengthen accountability of NSTC's strategic planning and coordination efforts. In conclusion, if NSTC's 5-year strategic plan is not developed in a way that aligns agencies' efforts to achieve governmentwide goals, enhances the federal government's ability to assess what works, and concentrates resources on those programs that advance the strategy, the federal government may spend limited funds in an inefficient and ineffective manner that does not best help to improve the nation's global competitiveness. Chairman Rokita, Ranking Member McCarthy, 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 testimony, please contact George A. Scott at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Other key contributors to this testimony include: Bill Keller, Assistant Director; Susan Baxter; James Bennett; Karen Brown; David Chrisinger; Melinda Cordero; Elizabeth Curda; Karen Febey; Jill Lacey; Ben Licht; Dan Meyer; Amy Radovich; James Rebbe; Nyree Ryder Tee; Martin Scire; Ryan Siegel; and Walter Vance. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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STEM education programs help to enhance the nation's global competitiveness. Many federal agencies have been involved in administering these programs. Concerns have been raised about the overall effectiveness and efficiency of STEM education programs. This testimony discusses (1) the number of federal agencies and programs that provided funding for STEM education programs in fiscal year 2010; (2) the extent to which STEM education programs overlap; and (3) the extent to which STEM education programs measured effectiveness and were aligned to a governmentwide strategy. This testimony is based on several previously published GAO reports and includes updates on actions taken in response to these reports. In fiscal year 2010, 13 federal agencies invested over $3 billion in 209 programs designed to increase knowledge of science, technology, engineering, and mathematics (STEM) fields and attainment of STEM degrees. The number of programs within agencies ranged from 3 to 46, with the Department of Health and Human Services, Department of Energy, and the National Science Foundation administering more than half of the 209 programs. Almost a third of all programs had obligations of $1 million or less, while some had obligations of over $100 million. Beyond programs specifically focused on STEM education, agencies funded other broad efforts that contributed to enhancing STEM education. Eighty-three percent of the programs GAO identified overlapped to some degree with at least 1 other program in that they offered similar services to similar target groups in similar STEM fields to achieve similar objectives. Many programs have a broad scope--serving multiple target groups with multiple services. However, even when programs overlap, the services they provide and the populations they serve may differ in meaningful ways and would therefore not necessarily be duplicative. Nonetheless, the programs are similar enough that they need to be well coordinated and guided by a robust strategic plan. Agencies' limited use of performance measures and evaluations may hamper their ability to assess the effectiveness of their individual programs as well as the overall STEM education effort. Specifically, program officials varied in their ability to provide reliable output measures--for example, the number of students, teachers, or institutions directly served by their program. Further, most agencies did not use outcomes measures in a way that is clearly reflected in their performance planning documents. In addition, a majority of programs did not conduct comprehensive evaluations since our prior review in 2005 and the time of our survey in 2011 to assess effectiveness, and the evaluations GAO reviewed did not always align with program objectives. Finally, GAO found that completed STEM education evaluation results had not always been disseminated in a fashion that facilitated knowledge sharing between both practitioners and researchers. In naming STEM education as a crosscutting goal, the administration is taking the first step towards better governmentwide coordinated planning; however, it will be important to finalize a governmentwide strategic plan so agencies can better align their performance plans and reports to new governmentwide goals. GAO previously recommended that the Office of Science and Technology Policy (OSTP) should direct the National Science and Technology Council (NSTC) to work with agencies to better align their activities with a governmentwide strategy, develop a plan for sustained monitoring of coordination, identify programs for consolidation or potential elimination, and assist agencies in determining how to better evaluate their programs. Since GAO's report, OSTP released a progress report that identified some programs for elimination, and the Office of Management and Budget (OMB) named STEM education one of its interim cross-cutting priority goals. GAO previously recommended that the Office of Science and Technology Policy (OSTP) should direct the National Science and Technology Council (NSTC) to work with agencies to better align their activities with a governmentwide strategy, develop a plan for sustained monitoring of coordination, identify programs for consolidation or potential elimination, and assist agencies in determining how to better evaluate their programs. Since GAO's report, OSTP released a progress report that identified some programs for elimination, and the Office of Management and Budget (OMB) named STEM education one of its interim cross-cutting priority goals.
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The National Aeronautics and Space Administration Authorization Act of 2010 directed NASA to, among other things, develop a space launch system as a follow-on to the Space Shuttle and as a key component in expanding human presence beyond low-Earth orbit. In 2011, NASA formally established the SLS program in response to this direction, and the Congress has provided continued support for the program. For example, the Congress has appropriated additional funding for SLS in each of the past 3 fiscal years above the level requested by the program. The cumulative additional funding totals about $610 million more than requested for SLS for fiscal years 2013, 2014, and 2015. NASA plans to develop three SLS launch vehicle capabilities, complemented by Orion, to transport humans and cargo into space. The first version of the SLS is a 70-metric ton launch vehicle known as Block I.the first in 2018 and the second in 2021/22. The vehicle is scheduled to fly an uncrewed Orion some 70,000 kilometers beyond the moon during NASA has committed to conduct two test flights of the Block I vehicle-- the first test flight, known as EM-1, and to fly a second mission--EM-2-- beyond the moon to further test performance with a crewed Orion vehicle. After 2021, NASA intends to build 105- and 130-metric ton launch vehicles, known respectively as Block IA/B and Block II, which it expects to use as the backbone of manned spaceflight for decades. NASA anticipates using the Block IA/B vehicles for destinations such as near- Earth asteroids and Lagrange points and the Block II vehicles for eventual Mars missions.infrastructure and systems needed to support processing and launch of Orion and SLS at Kennedy Space Center. See figure 1. The JCL is a quantitative probability analysis that requires the project to combine its cost, schedule, and risks into a complete quantitative picture to help assess whether the project will be successfully completed within cost and on schedule. NASA introduced the analysis in 2009, and it is among the agency's initiatives to reduce acquisition management risk. The move to probabilistic estimating marks a major departure from NASA's prior practice of establishing a point estimate and adding a percentage on top of that point estimate to provide for contingencies. NASA's procedural requirements state that Mission Directorates should plan and budget programs and projects with an estimated life-cycle cost greater than $250 million based on a 70 percent JCL, or at a different level as approved by the Decision Authority, and any JCL approved at less than 70 percent must be justified and documented. NASA Procedural Requirements (NPR) 7120.5E, NASA Space Flight Program and Project Management Requirements, paras. 2.4.4 and 2.4.4.1 (Aug. 14, 2012) (hereinafter cited as NPR 7120.5E (Aug. 14, 2012)). 2018 as schedule reserve and the $1.3 billion difference between the $8.4 billion goal and the $9.7 billion baseline as funding for that schedule reserve. Unlike cost reserves, however, that funding largely corresponds to those 11 months and cannot be used separately from schedule to address problems as they arise. In December 2014, we testified that the ground systems and Orion programs will likely not be ready to support EM-1 before November 2018 even if SLS is able to meet its earlier internal goal. During this testimony, NASA witnesses stated that the SLS program would not be able to meet its internal goal of December 2017 and that the program would likely slip the internal goal to summer 2018. See table 1 for more specifics on estimated launch dates. NASA generally followed best practices in preparing the SLS cost and schedule baseline estimates for the limited portion of the program life cycle covered, that is, through launch readiness for the first test flight of SLS. We found that the SLS program cost and schedule estimates for this limited portion of development substantially met three of four cost characteristics--comprehensive, well documented, and accurate--and both schedule characteristics--comprehensive and well constructed-- that GAO considers best practices for preparing a reliable estimate. However, because the cost estimate only partially met best practice criteria for credibility, the fourth cost characteristic, the estimates could not be deemed fully reliable. See figure 2. While the cost and schedule estimates were prepared largely in accordance with best practices, they only represent costs for the first flight of SLS, EM-1, as opposed to the program's full life cycle. In May 2014, we recommended that NASA establish a separate cost and schedule baseline for missions beyond EM-1 and report this information via its annual budget submission. Additionally, we recommended that NASA establish life-cycle cost and schedule baselines for each upgraded block of the SLS. NASA partially concurred with our recommendations, citing that actions it plans to take to track costs and actions already in place, such as establishing a block upgrade approach for SLS, met the intent of our recommendations. To this point, however, NASA has not put forth any estimates or baselines projecting the costs of future blocks of the SLS. Comprehensive: The SLS cost estimate substantially met the criteria for being comprehensive through launch readiness for EM-1 but did not include any costs beyond the first flight. To develop the estimate, officials used a detailed work breakdown structure--the structure used to define in detail the work necessary to accomplish program objectives--that is traceable to the cost of each work element and the contract statement of work and documented ground rules and assumptions. To fully meet the criteria for being comprehensive, however, the estimate should define in detail all costs through the expected life of a program. The estimate satisfied NASA's cost estimating approach for Human Exploration programs by including life-cycle costs through launch readiness for EM-1, but did not include any costs for deployment and operation and maintenance of SLS beyond the first flight. These costs will likely far exceed the costs of development through the first flight. For example, in October 2009, the Review of U.S. Human Spaceflight Plans Committee reported that the fixed costs of the facilities and infrastructure associated with the Shuttle program were about $1.5 billion a year. Given that NASA hopes to operate the SLS for decades, it is reasonable to expect that the deployment and operation and maintenance costs--which should be included in a reliable estimate of life-cycle costs--alone for the SLS will outweigh the agency's current estimated cost of $9.7 billion. NASA has stated that cost estimates do not need to cover the program from "cradle to grave." Rather, NASA's position is that the program's estimate is only meaningful up to the time that the SLS is delivered for its first launch, because the agency is taking what it calls a capability approach. Therefore, NASA has only estimated costs of the program to the point at which the capability will be achieved. Furthermore, NASA has yet to determine the number of launches, their missions, or the operating lifetime for the program, which according to agency officials makes it difficult to estimate the total costs of the program. Nevertheless, Office of Management and Budget guidance and GAO's Cost Assessment Guide indicate that life-cycle cost estimates should encompass the full life cycle of a program. Well Documented: The SLS cost estimate substantially met the criteria for being well documented; however, some explanations to support the estimate were missing. A well-documented cost estimate includes thorough documentation and is traceable to information sources. We found that the SLS cost estimate documentation discusses, and is consistent with, the program's technical baseline and provides evidence that the cost estimate was reviewed by management. The estimate also included explanations for how the estimates for the underlying components were created through an assessment of likely costs for each part of the system supplemented with an engineering review. In some instances, however, explanations of how historical data were normalized, that is, adjusted to support the estimate, were missing. For example, the cost estimate does not explain how historical costs for the space shuttle main engine were normalized to support the estimate. The purpose of data normalization is to make a given data set consistent with and comparable to other data used in the estimate so that they can be used for comparison analysis or as a basis for projecting future costs. Insufficient documentation of how the historical data were adjusted can hinder understanding and proper use of the estimate. Accurate: The SLS cost estimate substantially met the criteria for being accurate, but the continued accuracy of the estimate is in question because officials have no plans to periodically update the estimate. Accurate cost estimates are based on assessments of most likely costs, adjusted properly for inflation, and contain few, if any, minor mistakes. In addition, a cost estimate should be updated regularly to reflect significant changes in the program. The SLS cost estimate meets most of these characteristics as it is based on an assessment of likely costs, is adjusted properly for inflation, and contains few if any mistakes. Contrary to best practices, however, NASA does not periodically update the estimate based on actuals, which limits its use as a management tool for monitoring progress and planning future work. The program prepared its cost estimate and JCL in calendar year 2013. GAO's cost estimating best practices call for estimates to be continually updated through the life of the project, ideally every month as actual costs are reported in earned value management reports. Best practices also call for a risk analysis and risk simulation exercise--like the JCL analysis--to be conducted periodically through the life of the program, as risks can materialize or change throughout the life of a program. Unless properly updated on a regular basis, the cost estimate cannot provide decisionmakers with accurate information to assess the current status of the project. Agency officials have indicated that the SLS program has no plans to update the cost and schedule estimates underlying the JCL or the JCL itself, which calls into question the continued accuracy of the estimates. NASA's policy for space flight program and project management requires a program's committed cost estimate to be updated (rebaselined) if it exceeds the external baseline committed cost by 30 percent or more, and if a project is rebaselined, the JCL should be recalculated and approved as part of the rebaselining process. The NASA Cost Estimating Handbook, however, indicates that program cost estimates should be updated when program content changes and as programs move through their life-cycle phases and conduct milestone reviews, and recognizes that estimates regularly updated based on actual program performance give decisionmakers a clearer picture for major decisions. In addition, through our work assessing large scale programs at the Department of Defense we have found that some programs update cost estimates annually and regularly report progress relative to both threshold and objective targets. Credible: The SLS cost estimate only partially met the criteria for credibility because the SLS program did not cross-check the results of the estimate and did not commission an independent cost estimate. The purpose of developing a separate independent estimate and cross- checking the estimate is to test the program's estimate for reasonableness and, ultimately, to validate the estimate. Consistent with best practices, the program conducted a risk and uncertainty analysis that calculated the likely cost and schedule consequences on the program for each risk identified and conducted a duration sensitivity analysis to determine how varying the lengths of different tasks affected the program. Contrary to best practices, however, the SLS program did not cross- check the results of its cost estimate. The main purpose of cross- checking is to determine whether alternative estimating methods produce similar results. If cross-checking confirms the results of the estimate, then confidence in the estimate increases, leading to greater credibility. In addition, project officials did not commission an independent cost estimate--a separate estimate produced by an organization outside of the SLS program chain of command--which is considered one of the best and most reliable estimate validation methods because it provides an independent view of expected program costs that tests the program office's estimate for reasonableness. An estimate that has not been reconciled with an independent cost estimate has an increased risk of being underfunded because the independent cost estimate provides an objective and unbiased assessment of whether the project estimate is realistic. Because the cost estimate only partially met the criteria for credibility, the estimate does not fully reflect the characteristics of a quality estimate and cannot be considered fully reliable. While the program did not commission an independent estimate, NASA's Independent Program Assessment Office (IPAO)--which reviews NASA programs at key decision points in the life cycle to support approval decisions by the agency leadership--did review the program's cost estimate at the program's Key Decision Point C (KDP-C) review. KDP-C is the point in NASA's project life cycle where baseline cost and schedule estimates are established and projects begin implementation. During this review, the IPAO found that the SLS JCL process and cost model were sound; however, the IPAO also found that the program's initial SLS cost estimate appeared optimistic relative to predictions based on historical data from similar programs. For example, the IPAO reported that the program was underestimating the likely range of cost growth for four key elements--software development, core stage qualification, core stage testing, and procurement of the interim cryogenic propulsion stage. Senior agency officials indicated that, based in part on the results of the IPAO assessment, the program increased its estimate and the agency established higher cost and schedule baseline commitments for the program. Comprehensive: The SLS schedule estimate substantially met best practice criteria for being comprehensive through launch readiness for EM-1 but the schedule estimate did not account for work beyond that point. A comprehensive schedule includes all activities for both the government and its contractors necessary to accomplish a project's objectives as defined in the project's work breakdown structure. The SLS schedule reflected all activities in the program cost work breakdown structure, resources were appropriately allocated to the schedule, and the schedule realistically reflected how long each activity would take. Contrary to best practices, however, the schedule estimate, like the cost estimate, did not fully account for the deployment or operation and maintenance of the program--specifically work for flights beyond EM-1. Well Constructed: The SLS schedule estimate substantially met best practice criteria for being well constructed but not all activities on the critical path are directly affecting the finish date of the project. A schedule is well constructed if all its activities are logically sequenced in the most straightforward manner possible and it has a reliable critical path that determines which activities drive the project's earliest completion date. We found relatively few instances of activities that were not logically sequenced, and anomalies within the schedule were, in general, justified by program officials. For example, program officials explained that some of the anomalies were due to activities representing external deliveries to vendors. We found, however, that the schedule did not fully meet the criteria for a well-constructed schedule because not all activities on the critical path are truly affecting the finish date of the project, which could mask delays in the schedule. The SLS program has limited cost and schedule reserves to address potential issues as it enters its most challenging period. Schedule reserve is extra time, with the money to pay for it, in the program's overall schedule in the event that there are delays or unforeseen problems. For the SLS program, the 11-month difference between the program's internal launch readiness goal and its committed schedule baseline represents the program's schedule reserves. Cost reserves are additional funds that can be used to mitigate problems during the development of a program. For example, cost reserves can be used to buy additional materials to replace a component or, if a program needs to preserve schedule, cost reserves can be used to accelerate work by adding extra shifts to expedite manufacturing and save time. Because NASA anticipated a relatively flat budget for SLS, the agency chose to limit cost reserves and rely on schedule reserve--the 11 months between the internal launch readiness goal in December 2017 and the committed baseline in November 2018--as the primary way to mitigate risk. The SLS program, however, is planning to use 7 of the 11 months of schedule reserve, which would delay its planned goal for launch readiness for EM-1 from December 2017 to, tentatively, July 2018. At this point, the agency has not, however, delayed its baseline commitment date of November 2018. As a result, the agency would have only 4 months of schedule reserve remaining between July 2018 and November 2018 to address any further problems that it may encounter. See figure 3. Complex development efforts like SLS must plan to address myriad risks and unforeseen technical challenges. As mentioned above, cost and schedule reserves are one way to address risks and challenges. NASA's Marshall Space Flight Center, which manages the SLS program, has guidance requiring programs to present their planned cost and schedule reserves for approval prior to key milestones, but the guidance does not establish specific requirements for reserve levels. However, other NASA centers, such as the Goddard Space Flight Center--the NASA center with responsibility for managing other complex NASA programs such as the James Webb Space Telescope--has requirements for the level of both cost and schedule reserves that projects must have in place at KDP- C. At KDP-C, Goddard flight projects are required to have cost reserves of 25 percent or more and 1 month of schedule reserve for each year of development from KDP-C to the start of integration and testing, 2 months per year for integration and test through shipment to the launch site, and 1 week per month from delivery to launch site to actual launch. As a result of flat funding requests, the SLS program has very low levels of cost reserves compared to other programs and to cost reserve guidance of NASA centers. The IPAO noted that the program's planned cost reserves at the time of its review--6 percent--were too low and compared poorly to other development programs which normally had 30 percent cost reserves at a similar stage of development. To execute within the anticipated flat funding profile, the program extended its development schedule and limited the amount of cost reserves available--about $50 million each year, which is about 3.7 percent of the fiscal year 2016 budget request for the program. Program officials stated that these cost reserves were completely allocated to technical risks during the budget planning process, which leaves the program with schedule reserves as its sole resource to address unanticipated issues throughout the year. Operating with schedule reserves as the only option for addressing challenges, however, increases risk to the program's launch readiness date because any issue that occurs will impact the overall schedule. On a program like SLS such challenges are likely. For example, the current internal launch date delay is due, at least in part, to problems that are requiring the program to modify one of the four contracts for its major elements (the core stage, boosters, main engines, and interim upper stage). According to program officials, the program is modifying the core stage contract, in part, because the tooling that will be used to manufacture the 212-foot-tall core stage was vertically misaligned by the subcontractor during its installation. According to officials, the misalignment would have prevented production of the core stage. The necessary repairs are currently scheduled to be completed in August 2015. To address this challenge, as mentioned above, the program is anticipating using 7 of its 11 months of schedule reserve and will have only 4 months of schedule reserve to address risks with 3.5 years remaining until the program's committed baseline launch readiness date. The program, however, has yet to begin integration and testing where we have previously found projects can expect to encounter challenges that will impact schedule. Similarly, as part of its analysis of the SLS cost and schedule estimates, the IPAO reported that, based on its review of 20 historical NASA projects, the majority of schedule growth occurs after critical design review, which for SLS is currently scheduled for summer 2015. While the current delay has not impacted the program's November 2018 baseline commitment, it will increase risk to the committed date because--as noted above--the project has limited cost reserves and will now have limited schedule reserves to address any future problems or delays at the point when problems are most likely to occur. Using schedule reserve alone, rather than in combination with cost reserves, does not provide the program with the same level of flexibility to mitigate risks to maintain planned cost and schedule. GAO's Cost Estimating and Assessment Guide states that all development programs should have cost reserves. Problems always occur, and program managers need ready access to funding in order to resolve them without adversely affecting the program. In the case of SLS, if further problems arise associated with the program's main cost drivers--such as design and manufacturing of the core stage or developing the integrated flight software--the program officials will likely have to use what remains of the program's schedule reserve to resolve these problems. As the program has limited cost reserves, this would put the committed launch readiness date at risk. This approach--using only schedule reserve to address challenges--also leaves the program in the position of potentially having to, for example, descope planned work or to further delay test events or launch readiness in order to address technical risks and challenges, should those challenges exceed available resources. Both options have long-term risks. For example, if certain development efforts are deferred beyond EM-1, technical risk to EM-1, EM-2, or both may increase and could put additional cost and schedule pressure on EM-2--the first crewed flight-- because more work would then be required within EM-2's schedule before the program could achieve launch readiness. However, if development work--such as data analysis or a test event--is eliminated altogether, that loss of potential information may increase technical risk to EM-1. Similarly, delaying planned work is generally not a viable long-term solution. NASA has found that deferring planned work to stay within available budget often leads to increased costs in the long term. For example, in October 2010, the Independent Comprehensive Review Panel that reviewed the James Webb Space Telescope program found that delaying work due to inadequate cost reserves did not control program costs. Doing so delayed and increased costs--typically two or threefold--due to inefficiencies visited upon other dependent tasks. NASA is using contractor earned value management (EVM) data as an additional means to monitor costs for SLS, but the EVM data remain incomplete and provide limited insight into progress toward the program's Program officials external committed cost and schedule baselines.indicated that the current SLS contractor performance measurement baselines--which establish the program scope, schedule, and budget targets to measure progress against--are all based on the program's more aggressive internal goal for launch readiness for EM-1 in December 2017 and not its external committed date of November 2018. EVM systems rely on performance measurement baselines as the basis for measuring performance and use past performance trends to project an estimate at completion (EAC). An EAC is a calculation of the cost to complete authorized work based on a contractor's EVM performance to date. We reviewed the EAC provided by three prime contractors and found that they were below what our calculations predicted. Specifically, our analysis of the contractors' EVM data for the three prime contracts-- main engines, boosters, and core stage--indicates that the contracts could incur cost overruns ranging from about $367 million to about $1.4 billion, which is substantially higher than the combined overrun of $89 million that the three contractors were projecting at the time of our review. These projections do not take into account all of the in-house work conducted for the SLS program. The SLS program is in the process of instituting a program-level EVM system that may improve insight into the program's progress by providing aggregated tracking of both in-house and contractor performance on the SLS program that will present a more comprehensive assessment of program progress at least to internal cost and schedule goals. The SLS program-level EVM system, however, is not yet fully implemented. Specifically, because the core stage contract is being modified, EVM data will have to be reset to new performance measurement baselines. The Office of Management and Budget Circular A-11 and Capital Programming Guide requires EVM for major acquisitions with developmental effort. According to this guidance, when there is both government and contractor work, the data from the two EVM systems must be consolidated at the reporting level for total program management and visibility. Pulling together EVM data from multiple levels into a program-level report gives officials a comprehensive outlook of its cost and schedule and provides the project manager with early warning of potential cost and schedule overruns. In November 2012, we recommended that NASA establish a time frame by which all new spaceflight projects will be required to implement NASA's newly developed program-level EVM system. This system should improve management and oversight of its spaceflight projects by providing a consolidated tracking mechanism for all of the contract and NASA work conducted for a program. NASA officials stated that this SLS program- level EVM system would allow the program to better monitor progress relative to the committed cost and schedule baselines by comparing the aggregated EAC for both NASA and contractor work to the committed cost and schedule baselines. The delay in implementing program-level EVM data is, in part, due to the fact that the program was still in the process of modifying the core stage contract. According to program officials, they identified discrepancies between the agency's and the contractor's positions during the core stage contract integrated baseline review--a review conducted by program management to ensure a mutual understanding of the contract's performance measurement baseline. Specifically, program officials determined that the core stage contract needs to be modified to accommodate delays associated with addressing technical issues with misaligned tooling and to resolve differences between the program and the contractor regarding the level of funding available to begin work on the exploration upper stage. Further, NASA officials stated that the program-level EVM will not fully reflect program progress until a new internal program launch readiness goal is set and contract performance measurement baselines are updated to reflect these new goals for all NASA and contractor activities. The officials also stated that the internal program launch readiness goals will not be set until after the agency has a better understanding of the expected fiscal year 2016 appropriations and has completed the planning for the fiscal year 2017 budget request. Operating without program-level EVM leaves SLS at risk of encountering unexpected cost and schedule growth. Both contractor and program-level EVM data, however, is only reported relative to the December 2017 date, according to program officials. The potential impact of cost and schedule growth relative to the program's external committed cost and schedule baseline of November 2018 is neither reported nor readily apparent and renders the EVM data less useful in support of management decisions and external oversight. Major NASA programs are required by statute to report annually to certain congressional committees on changes that occurred over the prior year to the program's committed cost and schedule baseline, among other As this report reflects cost and schedule overruns that have things.already occurred, it does not serve as a mechanism to regularly and systematically track progress against committed baselines so that decisionmakers have visibility into program progress and can take proactive steps as necessary before cost growth or schedule delays are realized. The SLS program has not updated its cost and schedule estimates since 2013, rendering them less reliable as program management and oversight tools. Since the estimates were created, the program has received substantial funding increases in 2014 and 2015 but has also realized both expected and unexpected risks that are forcing the program to delay its internal goal for launch readiness. The program's cost and schedule estimates, however, do not reflect all of these changes or the 2 years of additional contractor performance data that the program has accumulated since 2013. Without regular updates, developed in accordance with best practices--including cross-checking to ensure credibility and thorough explanations of how the updates were prepared-- cost estimates lose their usefulness as predictors of likely outcomes and as benchmarks for meaningfully tracking progress. Updated cost and schedule estimates would provide program and agency officials with a more informed basis for decision making and provide the Congress with more accurate information to support the appropriation process. In addition, tracking and reporting progress relative to the external cost and schedule baseline commitments on only an annual basis and only once issues have already occurred limits NASA's ability to continually monitor progress and forecast potential risks to these cost and schedule baselines, such that proactive action can be taken by decisionmakers. Until a comprehensive program-level EVM system, reporting to a realistic performance measurement baseline, is fully implemented, agency leadership and external stakeholders will lack an accurate measure of the program's true progress. Further, by pursuing internal launch readiness dates that are unrealistic, the program leaves itself and others in a knowledge void wherein progress relative to the agency's commitments is difficult to ascertain. As the EVM system only tracks progress toward the program's internal goals, the program lacks a mechanism to track progress to its external cost and schedule baseline commitments. Without such a tracking tool, stakeholders will lack early insight into potential overruns and delays. To ensure that the SLS cost and schedule estimates better conform with best practices and are useful to support management decisions, GAO recommends that the NASA Administrator direct SLS officials to update the SLS cost and schedule estimates, at least annually, to reflect actual costs and schedule and record any reasons for variances before preparing their budget requests for the ensuing fiscal year. To the extent practicable, these updates should also incorporate additional best practices including thoroughly documenting how data were adjusted for use in the update and cross-checking results to ensure they are credible. To provide more comprehensive information on program performance, the NASA administrator should direct the SLS program to expedite implementation of the program-level EVM system. To ensure that decisionmakers are able to track progress toward the agency's committed launch readiness date, the NASA administrator should direct the SLS program to include as part of the program's quarterly reports to NASA headquarters a reporting mechanism that tracks and reports program progress relative to the agency's external committed cost and schedule baselines. NASA provided written comments on a draft of this report. These comments are reprinted in appendix II. In written comments on a draft of this report, NASA concurred with our three recommendations. NASA agreed that updating cost and schedule estimates is a program management best practice and indicated that moving forward the program would use its budget formulation processes to update its cost and schedule estimates for the first demonstration of the initial SLS capability on Exploration Mission 1 (EM-1) following the enactment of NASA's final appropriations each fiscal year. We are encouraged that NASA plans to update its cost estimate for SLS annually. To satisfy the recommendation, we would expect that any updates would address the deficiencies we identified in NASA's original estimate for SLS, including thoroughly documenting how data were adjusted for the update and cross-checking the results to ensure credibility. NASA also recognized that having an EVM system in place is a program management best practice useful for ensuring effective program control. NASA indicated that it is in the process of implementing program-level EVM but that the system would not be fully in place until the stages contract is modified and an independent baseline review is completed in the third quarter of fiscal year 2016. We appreciate that NASA plans to implement the program level EVM system as soon as the stages contract is rebaselined, but we remain concerned that the stages contract will remain undefinitized until spring 2016. We reported in July 2014 that the stages contract had remained undefinitized for an extended period and that leaving the SLS contracts undefinitized for extended periods placed the government at increased risk of cost and schedule growth and limits the program's ability to monitor contractor progress. Likewise, until certified EVM data from the stages contract is available, the SLS program will lack a key tool for tracking and forecasting progress as the program approaches its committed November 2018 launch readiness date. NASA also agreed that the program should implement a reporting mechanism that tracks and reports program progress relative to the agency's external committed cost and schedule baselines. NASA indicated that the SLS program-level EVM system would satisfy this recommendation when it is fully implemented and included as part of the SLS program's normal quarterly reporting to the Exploration Systems Development Division at NASA Headquarters. Given that EVM data is typically reported relative to contractual targets, in this case the program's internal goals, we would expect that these quarterly reports would also include additional elements addressing progress relative to the program's external committed cost and schedule baselines. We are sending this report to NASA's Administrator and to appropriate congressional committees. In addition, the report will be available at no charge on GAO's website at http://www.gao.gov. Should you or your staff have any questions on matters discussed in 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. Other key contributors to this report are listed in appendix III. To assess the reliability of the National Aeronautics and Space Administration's (NASA) Space Launch System (SLS) cost and schedule estimates, we determined the extent to which the estimates were consistent with best practices for cost estimating and scheduling as identified in GAO's Cost Assessment Guide and Schedule Assessment Guide. We examined documents supporting the cost and schedule estimates, such as detailed spreadsheets that contain cost, schedule, and risk information and the timing and availability of funding and reserves. We also met with independent reviewers of the SLS Joint Cost and Schedule Confidence Level (JCL), reviewed their report on the program, and determined the extent to which the SLS program addressed any concerns the reviewers raised concerning the JCL estimate. In addition, we met with program and agency officials to discuss the baseline cost and schedule estimates, potential program schedule changes, and the program's cost and schedule reserve postures, among other issues. We did not assess the credible or controlled criteria of the schedule estimate as the estimate was completed to support a JCL. The controlled criterion deals, in part, with updating the schedule periodically. A JCL, however, is not designed to be used as an updating tool. The credible criterion relates, in part, to a risk assessment of the schedule. The summary schedule estimate, however, was developed specifically for use in developing the SLS program's JCL, which requires its own risk assessment to calculate probability of meeting cost and schedule baselines, and would make the schedule estimate risk assessment unnecessary in this instance. To assess the availability of program cost and schedule reserves for resolving development challenges, we analyzed budget requests, appropriations, and program budget projections. We also reviewed prior NASA reviews that called the program's reserves into question, briefings to program and agency management that confirmed the program's internal goals, and program risk assessments that outlined program risks and potential impacts. In addition, we met with senior agency officials, program management, and program budget specialists to discuss the program's budget and reserve postures. To assess the insight that the program's earned value management (EVM) system provides into progress relative to the program's cost and schedule baseline commitments we obtained and analyzed contractor cost and schedule reporting, or EVM, data for the three contractors for which it was available, determined whether the contractors are forecasting cost and schedule growth, and calculated our own forecasts of likely cost and schedule growth. We also collected available program- level EVM data to determine whether it could be used as an indicator for program progress. We met with program EVM and schedule managers to discuss any concerns with contractor cost and schedule reporting as well as the creation of the program-level EVM process. We conducted this performance audit from September 2014 to July 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. Cristina T. Chaplain (202) 512-4841 or [email protected]. In addition to the contact named above, Shelby S. Oakley (Assistant Director), Jennifer K. Echard, Laura Greifner, Kristine Hassinger, Sylvia Schatz, Dina Shorafa, Ryan Stott, Ozzy Trevino, and John S. Warren, Jr. made key contributions to this report.
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SLS is NASA's first heavy-lift launch vehicle for human space exploration in over 40 years. For development efforts related to the first flight of SLS, NASA established its cost and schedule commitments at $9.7 billion and November 2018, respectively. The program, however, has continued to pursue more aggressive internal goals for cost and schedule. GAO was asked to assess a broad range of issues related to the SLS program. This report focuses on NASA's cost estimate for the initial phases of SLS and other management tools needed to control costs. Specifically, this report examines the extent to which SLS's (1) cost and schedule estimates for its first test flight are reliable; (2) cost and schedule reserves are available to maintain progress toward this flight test; and (3) EVM data provides meaningful insight into progress. To do this work, GAO examined documents supporting the cost and schedule estimates, contractor EVM data, and other relevant program documentation, and interviewed relevant officials. The cost and schedule estimates for the National Aeronautics and Space Administration's (NASA) Space Launch System (SLS) program substantially complied with five of six relevant best practices, but could not be deemed fully reliable because they only partially met the sixth best practice--credibility. While an independent NASA office reviewed the estimate developed by the program and as a result the program made some adjustments, officials did not commission the development of a separate independent estimate to compare to the program estimate to identify areas of discrepancy or difference. In addition, the program did not cross-check its estimate using an alternative methodology. The purpose of developing a separate independent estimate and cross-checking the estimate is to test the program's estimate for reasonableness and, ultimately, to validate the estimate. The continued accuracy of the estimates is also questionable because officials have no plans to update the original estimates created in 2013. GAO's cost estimating best practices call for estimates to be continually updated through the life of the program to provide decisionmakers with current information to assess status. Moreover, as stressed in prior GAO reports, SLS cost estimates only cover one SLS flight in 2018 whereas best practices call for estimating costs through the expected life of the program. Limited cost and schedule reserves place the program at increased risk of exceeding its cost and schedule commitments. Although the SLS program is committed to a November 2018 launch readiness date, it has been pursuing an internal goal for launch readiness of December 2017, with the time between December 2017 and November 2018 being designated as schedule reserve. The SLS program expects to use a significant amount of schedule reserve, in part to address some technical challenges, and plans to shift its internal goal from December 2017 to tentatively July 2018. This shift will reduce the amount of available schedule reserve from 11 months to just 4 months. In addition, the program planned for cost reserves of less than 4 percent each year and has already allocated those funds for this year, which leaves no reserve funding available to address unanticipated issues. Earned value management (EVM) data for SLS remains incomplete and provides limited insight into progress toward the program's external committed cost and schedule baselines because it tracks progress relative to the program's internal goals--which have proven unrealistic. EVM data is intended to provide an accurate assessment of program progress and alert managers of impending schedule delays and cost overruns. GAO analysis of available SLS contractor EVM data indicated that the contractors may incur cost overruns ranging from about $367 million to about $1.4 billion, which is significantly higher than what the contractors were reporting--$89 million. SLS is implementing a program-level EVM system that, once complete, will include all contractor work and work conducted in-house by NASA and may provide more comprehensive information on program progress relative to internal goals. Tracking to internal goals, however, provides limited information relative to progress toward external commitments. At present, the SLS program lacks comprehensive program-level reporting to alert managers of impending delays and cost overruns to external commitments. NASA should direct SLS program officials to update the cost and schedule estimates at least annually, and to implement a mechanism that reports progress relative to external committed cost and schedule baselines on a quarterly basis, among other actions. NASA concurred with GAO's recommendations.
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The C-17 is being developed and produced by McDonnell Douglas. The Congress has authorized procurement of 40 C-17 aircraft through fiscal year 1996. As of October 1, 1995, McDonnell Douglas had delivered 22 production aircraft to the Air Force. In November 1995, the Department of Defense (DOD) announced plans to buy an additional 80 C-17 aircraft. In addition to procuring the aircraft, the Air Force is purchasing spare parts to support the C-17. The Air Force estimates the total cost for initial spares--the quantity of parts needed to support and maintain a weapon system for the initial period of operation--for the first 40 C-17s to be about $888 million. In January 1994, we reported that the Air Force had frequently ordered C-17 spare parts prematurely. We noted that premature ordering occurred because the Air Force used inaccurate and outdated information, bought higher quantities than justified, or did not follow regulations governing the process. As a result, DOD revised its guidance to limit the initial procurement of spares, and the Air Force canceled orders for millions of dollars of C-17 parts. Initial spares for the C-17 are being procured under two contracts. Some are being provided under the C-17 development contract through interim contractor support. That support, which started in mid-1993, involves providing spares and technical support for two C-17 squadrons through June 1996. As of May 31, 1995, the Air Force had spent about $198 million for interim contractor support. The remaining initial spares are being procured under contract F33657-81-C-2109 (referred to in this report as contract-2109). Under this contract, the Air Force, as of May 31, 1995, had obligated $120 million for initial spares, but negotiated prices for only about $29 million of the spares. The $91 million balance was the amount obligated for parts ordered on which prices had not been negotiated. McDonnell Douglas produces some spare parts in its facilities at the Transport Aircraft Division at Long Beach, California, where the C-17 is being produced, or at other locations, such as its Aerospace-East Division at St. Louis. It also subcontracts for the production of parts. The subcontractors may be responsible for all aspects of part production or McDonnell Douglas may furnish materials or complete required work. The Air Force paid higher prices for 33 spare parts than appears reasonable when compared to McDonnell Douglas' historical costs. The 33 spare parts were ordered under contract-2109 and manufactured by McDonnell Douglas' St. Louis Division. The Long Beach Division had previously purchased them from subcontractors for production aircraft at much lower costs. The St. Louis Division's estimated costs were from 4 to 56 times greater than the prices that Long Beach had paid outside vendors several years earlier. The parts were in sections of the C-17 assembled by the Long Beach Division for the first four aircraft, but assembled by the St. Louis Division for subsequent aircraft. For 10 parts, McDonnell Douglas had previously purchased the complete part from a subcontractor. For the other 23 parts, it had furnished material to a subcontractor that manufactured the part. While our examination of price increases was limited to 33 spare parts, an Air Force-sponsored should-cost review identified potential savings of $94 million for the C-17 program if work is moved from McDonnell Douglas' St. Louis Division to outside vendors or other McDonnell Douglas facilities. Air Force officials said that the $94 million savings related only to components for production aircraft. They said that the savings would be higher if spare parts were included. We identified 10 parts--7 hinges on the air inlet door to the C-17's air conditioning system, 2 cargo door hooks, and a door handle on the C-17's vertical stabilizer access door--that McDonnell Douglas had previously purchased complete from a subcontractor at much lower costs. Information on previous purchase costs, McDonnell Douglas' manufacturing costs, and the price that the Air Force paid for each of these spare parts are included in appendix I. Details on one of the hinges follow. The Air Force paid $2,187 for one hinge on the air inlet door to the C-17's air conditioning system. The hinge (see fig. 1) is aluminum, about 4 inches long, 2 inches wide, and ranges from about 1/16 of an inch to 1-3/8 inches thick. The Long Beach Division, which assembled the air conditioning inlet door for initial production, purchased 14 of these hinges from a subcontractor in 1988 for use on production aircraft at $30.60 each. It had also paid the vendor $541 for first article inspection and $2,730 for reusable special tooling. These costs, however, would not have been incurred on future orders. In 1992, McDonnell Douglas transferred the air conditioning inlet door assembly work to its St. Louis Division and that division made the hinge for production aircraft and for the spare part order. The estimated cost for the spare hinge was $1,745, and, with overhead, profit, and warranty factors, the Air Force paid $2,187 for it. The fact that the subcontractor had made the hinge from a special casting while the St. Louis Division machined the hinge from bar stock could be one cause of the higher price. We identified 23 parts--21 different cargo door hooks and 2 different hinge assemblies--where McDonnell Douglas had previously furnished material to a subcontractor who produced the parts at much lower costs. Information on previous purchase costs and McDonnell Douglas manufacturing costs are included in appendix II. Details on one of the door hooks follow. The Air Force paid $12,280 for one of the hooks. The hook (see fig. 2) is made of steel and is about 7 inches high, 3-1/2 inches wide, and about 4-1/2 inches thick. For the early production aircraft, the Long Beach Division had furnished material valued at $715 to an outside vendor in 1992 who manufactured this hook for $389 (exclusive of the material value). After initially using hooks for production aircraft provided from the Long Beach Division's inventory, the St. Louis Division made them starting with production aircraft number 12. For the spares order under contract-2109, the St. Louis Division estimated "in-house" manufacturing costs (exclusive of material costs) at about $8,842. McDonnell Douglas officials said that the primary reason for moving various work from the Long Beach Division to the St. Louis Division was to recover from being behind schedule and that sufficient time was not available to procure parts from vendors. McDonnell Douglas officials also said that now that production deliveries are on schedule, they will be reviewing parts to identify the most affordable and effective manufacturing source and that 17 of the 33 parts have been identified as candidates to move out of St. Louis to achieve lower C-17 costs. DOD advised us that DPRO officials at McDonnell Douglas had estimated the cost difference between production by McDonnell Douglas versus subcontractors for the 33 parts to be $141,000 and, after further analysis,had determined that $65,000 was excessive. McDonnell Douglas refunded that amount in December 1995. Our review of the data submitted to support the pricing of selected spare parts orders showed that McDonnell Douglas' St. Louis Division used outdated pricing information when proposing costs under intercompany work orders with the Long Beach Division for the C-17 spares. The St. Louis division used labor variance factors based on the second quarter of 1992 for proposing labor hours required for items produced in 1994. Most of these orders were negotiated with DCMC in mid-1994. As of May 31, 1995, DCMC had negotiated prices for 95 contract items made by the St. Louis Division with a total negotiated value of about $966,000. We reviewed data for 37 of these items with a negotiated total value of $347,000. We reviewed only labor variance factors and did not address other rates and factors such as the miscellaneous production factor. We found that the selected items were overpriced by $117,000, or about 34 percent of the negotiated value of the items reviewed. For example, McDonnell Douglas, in developing the basic production labor hours estimate for a hinge assembly multiplied machine shop "target" hours by a variance factor of 2.33 and sheet metal target hours by a variance factor of 2.5. Data for the first quarter of 1994 showed a conventional machine shop variance of 1.26 and a sheet metal variance of 1.60. Because most work for this item took place in the first half of 1994 and the prices were negotiated in June 1994, the 1994 variance rates should have been used for pricing the item. Instead, McDonnell Douglas used rates based on the second quarter of 1992, which were higher. A price of $42,587 was negotiated based on the 1992 data. Using the data for the first quarter of 1994, the price would have been $26,458, a difference of $16,129, or about 38 percent lower than the negotiated price. After we brought these issues to the attention of DOD officials, they acknowledged that more current labor variance data should have been used and sought a refund. McDonnell Douglas made a refund of $117,000 in December 1995. Our review indicated that the profits awarded for some orders under contract-2109 appear higher than warranted. DFARs requires the use of a structured approach for developing a government profit objective for negotiating a profit rate with a contractor. The weighted guidelines approach involves three components of profit: contract type risk, performance risk, and facilities capital employed. The contracting officer is required to assess the risk to the contractor under each of the components and, based on DFARs guidelines, calculate a profit objective for each one and, thus, an overall profit objective. As a general matter, the greater the degree of risk to the contractor, the higher the profit objective. For example, the profit objective for a fixed-price contract normally would be higher than that for a cost-type contract because the cost risk to the contractor is greater under the former. Consequently, in its subsequent price negotiations, the government normally will accept a higher profit rate when a contractor is accepting higher risks. The price of spare orders under contract-2109 were to be negotiated individually. However, rather than calculate separate profit objectives and negotiate profit rates for individual orders, DPRO and McDonnell Douglas negotiated two predetermined profit rates, documented in a memorandum of agreement, that would apply to subsequent pricing actions. The profit rates were 10 percent for parts that McDonnell Douglas purchased from subcontractors, and 15 percent for spare parts that McDonnell Douglas manufactured. Our review indicates that the use of these rates for many later-priced spares resulted in higher profits for the contractor than would have been awarded had objectives been calculated and rates negotiated when the orders actually were priced. Based on profit rates of 6 percent for purchased parts and 13 percent for parts made in-house, both of which could have been justified according to our calculations, McDonnell Douglas would have received less profit. For example, applying these lower profit rates to the $29 million of negotiated spare part orders as of May 31, 1995, would have reduced the company's profit by $860,000. After we presented our information in October 1995, DCMC directed that the memorandum of agreement, which was scheduled to either expire or be extended on November 1, 1995, be allowed to expire and that future profit objectives be established on an order-by-order basis. DOD officials agreed that a single profit analysis should not be used for C-17 spare parts. In developing a profit objective for contract-2109, the contracting officer assigned a value for contract type risk based on firm, fixed-price contracts. However, negotiations of prices for spare part orders were conducted, in many cases, after the vendor or McDonnell Douglas had incurred all costs and delivered the spares. These conditions lowered the contractor's risk for those parts far below what normally would be expected for a firm, fixed-price contract. The risks were more like those that exist for cost-type contracts, for which the weighted guidelines provide lower profit objective values. Of the 40 parts made in-house that we reviewed, McDonnell Douglas had delivered 25 (63 percent) of the parts at the time of price negotiations with the government. Five of the remaining 15 items were delivered during the month of price negotiations, and all were delivered within 3-1/2 months of price negotiations. Of the 55 "buy" spare parts we reviewed, McDonnell Douglas had established prices with its vendor for 45 (82 percent) of the parts. Using one order as an example, McDonnell Douglas (1) negotiated spare parts prices with its subcontractor on January 25, 1993; (2) negotiated prices with the government on April 11, 1994; and (3) scheduled the parts for delivery on May 27, 1994. Thus, for both make and buy items, a substantial portion of the contractor's costs had been known at the time of the price negotiations. Section 217.7404-6 of DFARs requires that profit allowed under unpriced contracts reflect the reduced risk associated with contract performance prior to negotiations. Consistent with this requirement, the weighted guidelines section (215.971-3) requires the contracting officer to assess the extent to which costs have been incurred prior to definitization of a contract action and assure profit is consistent with contractor risk. In fact, the guidelines provide that if a substantial portion of the costs has been incurred prior to definitization, the contracting officer may assign a contract type risk value as low as zero, regardless of contract type. A DPRO representative said that, in negotiating the memorandum of understanding, DPRO knew that the two profit rates for later application would not be perfect in every case. He said, however, that they were expected to be off in one direction as often as in the other, creating an overall fair agreement. The representative noted, for example, that while deliveries for the orders we reviewed were near the negotiation dates, the memorandum's rates also would apply to orders with deliveries more than 2 years in the future, where minimal costs have been incurred. In addition, the representative stated that a significant number of parts would be undergoing design changes because a baseline configuration for the C-17 did not exist. The representative explained that McDonnell Douglas is responsible for replacing spares affected by design changes until 90 days after reliability, maintainability, and availability testing, which was completed on August 5, 1995, and that any additional cost for such replacements would have to be absorbed by McDonnell Douglas. Finally, the representative noted that the minimal cost history on C-17 spares would indicate a higher than normal contract type risk. We have no evidence to support the DPRO official's view that profits based on the rates in the memorandum of agreement would balance out over time. In fact, DCMC let the agreement lapse and will calculate profit objectives and negotiate profit rates on an order-by-order basis. In addition, we noted that McDonnell Douglas initially received a 2-percent warranty fee on contract-2109 orders to cover both the risk of design changes and provide a standard 180-day commercial warranty. Furthermore, the profit agreement stated that McDonnell Douglas could submit additional warranty substantiation at any time and, if the data supported a different percent for warranty, the government would consider adjusting the percentage. Thus, the warranty fee is the contract mechanism the parties agreed to use to address the risks of replacement parts because of design changes. The contracting officer, in developing a profit objective for buy orders (complete spare parts purchased from an outside vendor) under contract-2109, used a higher rate for performance risks than was warranted. The DFARs' weighted guidelines provide both standard and alternate ranges for the contracting officer to use in calculating performance risk, which is the component of profit objective that addresses the contractor's degree of risk in fulfilling the contract requirements. The standard range applies to most contracts, whereas the higher alternate is for research and development and service contracts that involve low capital investment in buildings and equipment. The guidelines provide that if the alternate range is used, the contracting officer should not give any profit for the remaining component, facilities capital employed, which focuses on encouraging and rewarding aggressive capital investment in facilities that benefit DOD. DCMC officials said that the alternate range was used in calculating the performance risk component on contract-2109 because McDonnell Douglas' system could not provide an estimate to be used for purposes of calculating the facilities capital component. DPRO officials said that since the negotiation, McDonnell Douglas has developed the means to estimate facilities capital employed on its spares proposals. They said that using the standard range for performance risk and including facilities capital employed for spares orders yields a profit objective that is substantially the same as the profit objective calculated using the alternate range for performance risk. DOD concurred that DPRO should not have utilized the alternate range for performance risk, but repeated the DPRO's assertion that using the standard range and including facilities capital employed yields essentially the same results. We reviewed DCMC's data and found that using the alternate range for the performance risk component does not result in a substantially similar profit objective to that calculated by applying a factor for facilities capital employed. The contracting officer's use of the alternate range for performance risk, combined with the use of a fixed-price value for contract type, led to the negotiation of a profit rate of 10 percent for the buy orders; in contrast, we calculated that using a cost-type contract risk factor, the standard range for performance risk, and McDonnell Douglas' estimate of facilities capital employed would have resulted in an overall profit objective of 6 percent for the buy orders. In commenting on a draft of this report, DOD said that it had taken appropriate action to address our finding of overpricing. In addition to recovering $182,000, DOD indicated that DPRO at McDonnell Douglas will now screen all spares orders containing items to be made in-house to (1) look for possible conversion to buy items and (2) ensure that labor data is correct for all items made in the St. Louis Division. Moreover, DOD stated that DPRO no longer relies on a single profit analysis and, by completing a separate analysis for each order, DPRO will address the contract risk associated with each order. DOD acknowledged that it is possible to take issue with the contracting officer's selection of risk factors and that DPRO should not have used the alternative range for performance risk in its profit analysis. However, DOD asserts that it would be misleading to infer that unjustified profits were paid to the contractor. We do not infer that the contractor received $860,000 in unjustified profits. Determining the appropriate amount of profits is a matter to be negotiated between DPRO and the contractor. However, we noted that (1) lower rates were justified under the weighted guidelines and (2) rates of 6 percent for purchased parts and 13 percent for parts made in-house could be justified. While the results of our review cannot be be projected to all C-17 spare parts, using the lower profit rates for the $29 million of negotiated spare parts orders as of May 31, 1995, would have reduced the company's profit by $860,000. Our subsequent analysis raises some questions about the DOD statement that DPRO, by making a separate profit analysis for each order, will address the contract type risk associated with each order. Our review of an order negotiated in January 1996 based on a separate profit analysis indicated that the DPRO's profit analysis continues to not reflect the reduced risk when most costs have been incurred prior to price negotiations. While the negotiated profit rate was 8.6 percent, or 1.4 percent lower than the previously negotiated rate, the amount of profit allowed for contract type risk continues to appear higher than justified by the weighted guideline and DFARs. In this regard, DPRO noted that McDonnell Douglas' cost "amounts to only 46 hundreths of one percent" and "you are being paid all your costs and the parts have already been shipped, thereby reducing your risk to a very low degree." However, the contract risk factors were at the midpoint range and higher for a firm, fixed-price contract. The stated reason for this was that the design could change, necessitating a recall. While DPRO discontinued using the memorandum of understanding profit rates, we remain concerned that the negotiated profit rates may not reflect the reduced contract type risk when essentially all costs have been incurred. DOD's comments are reprinted in their entirety in appendix III. To select spare parts for our review, we analyzed reports developed by McDonnell Douglas' data system that included historical and current information on spare parts orders--for example, the negotiation date, negotiation amount, and delivery date on current/previous orders. For our review, we only considered spare parts orders for which prices had been negotiated as of May 31, 1995. As of that date, prices for orders involving 696 spare parts had been negotiated, with a value of about $29 million. We selected spare parts for a more detailed review based on current/previous cost, intrinsic value, and nomenclature. Our selection of parts was judgmental and our results cannot be projected to the universe of C-17 parts. We reviewed the contractor's and the DPRO's contract and pricing files, and discussed the pricing issues with selected contractor and DCMC officials. As a result of rather significant cost increases for a number of spare parts that had the manufacturing/assembly effort transferred to the contractor's plant in St. Louis, we obtained additional documentation from the contractor's plant in St. Louis and DPRO. We reviewed the DFARs guidance relating to the use of weighted guidelines in establishing a profit objective. We also reviewed the memorandum of agreement that was negotiated by DPRO for contract-2109 and discussed the basis for the negotiated profits with DOD and DPRO officials. In assessing the value assigned to contract type risk, we reviewed data on 95 spare parts with a total negotiated price of about $3 million out of 696 spare parts with a total negotiated price of about $29 million, or about 14 percent of the parts. Our review of selected spare parts cannot be projected to all C-17 spare parts. However, to illustrate the potential effect of lower profit rates, we calculated a potential reduction using spare parts orders negotiated as of May 31, 1995. We conducted our review between November 1994 and September 1995 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies to the Secretaries of Defense and the Air Force; the Director, Office of Management and Budget; 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 contact me on (202) 512-4841. The major contributors were David Childress, Larry Aldrich, Kenneth Roberts, and Larry Thomas. 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 reviewed the pricing of certain spare parts for the C-17 aircraft, focusing on those spare parts that experienced significant price increases when McDonnell Douglas decided to produce them in-house rather than purchase them from outside vendors. GAO found that: (1) GAO's review indicates that the Air Force paid higher prices for spare parts than is justified; (2) for 33 selected spare parts formerly procured under subcontracts, costs are from 4 to 56 times higher after McDonnell Douglas moved the work in-house; (3) for example, McDonnell Douglas paid an outside vendor $389 to machine a door hook that it subsequently machined in-house at its St. Louis Division at an estimated cost of $8,842; (4) costs for some spare parts are higher than justified because McDonnell Douglas used outdated pricing data that overstated its proposed prices; (5) in developing the proposed costs of selected spare parts, McDonnell Douglas used outdated labor variance factors, which resulted in prices being overstated by 34 percent ($117,000) for 37 parts; (6) the profits awarded on some orders under contract-2109 appear higher than warranted; (7) the contracting officer used Defense Federal Acquisition Regulation Supplement guidelines to calculate profit objectives and negotiate profit rates with the contractor that are documented in a memorandum of agreement; (8) the contracting officer developed the government's objectives based on the risks of a fixed-price contract; (9) however, most costs were known when the order prices were negotiated; therefore, the contractor's risks were lower than in a fixed-price environment; (10) also, the contracting officer used a higher performance risk factor than appears appropriate when McDonnell Douglas is buying spare parts from subcontractors; and (11) based on profit rates that GAO's calculations suggest could have been justified, McDonnell Douglas would have received less profit. GAO also found that: (1) as GAO discussed its findings with Department of Defense (DOD) officials during GAO's review, they began taking actions to address those findings; (2) for example, the Defense Contract Management Command's Defense Plant Representative Office at McDonnell Douglas calculated that the overpricing of spare parts was $182,000 and recovered that amount from McDonnell Douglas in December 1995; and (3) DOD stated that other actions are being taken to prevent these overpricing problems on other spare parts.
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Before 2006, companies choosing to participate in the Medicare Advantage program were required to annually submit an ACRP to CMS for review and approval for each plan they intended to offer. The ACRP consisted of two parts--a plan benefit package and the adjusted community rate (ACR). The plan benefit package contained a detailed description of the benefits offered, and the ACR contained a detailed description of the estimated costs to provide the package of benefits to an enrolled Medicare beneficiary. These costs were to be calculated based on how much a plan would charge a commercial customer to provide the same benefit package if its members had the same expected use of services as Medicare beneficiaries. CMS made payments to the companies monthly in advance of rendering services. In 2003, Congress enacted the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA). MMA included provisions that established a bid submission process to replace the ACRP submission process, as well as a new prescription drug benefit, both effective for 2006. Under the bid process, an organization choosing to participate in Medicare Advantage is required to annually submit a bid for review and approval for each plan they intend to offer. The bid submission includes the organization's estimate of the cost of delivering services (submitted on a bid form) to an enrolled Medicare beneficiary and a plan benefit package that provides a detailed description of the benefits offered. In addition, each MA organization and prescription drug plan that offers prescription drug benefits under Part D is required to submit a separate prescription drug bid form, a formulary, and a plan benefit package to CMS for its review and approval. On the bid forms, MA organizations include an estimate of the per-person cost of providing Medicare-covered services. BBA requires CMS to annually audit the submissions of one-third of MA organizations. In defining what constituted an organization for the purpose of selecting one-third for audit, CMS officials explained that they determined the number of participating organizations based on the number of contracts they awarded. Under each contract, an organization can offer multiple plans. Further, an organization like Humana Inc. can have multiple contracts. CMS contracts with accounting and actuarial firms to perform these audits. For audits of the contract year 2006 bid forms, CMS contracted in September 2005 with six firms. CMS gave the auditors guidance. It is important to note that the audit guidance includes procedures to verify information used in the projection or estimation of costs submitted in the bids, not actual results or costs each year, as the bids do not report actual costs. According to our analysis of available CMS data, CMS did not meet the statutory requirement to audit the financial records of at least one-third of the participating MA organizations for contract years 2001 through 2005, nor has it done so yet for the 2006 bid submissions. We performed an analysis to determine whether CMS had met the requirement because CMS could not provide documentation to support the method it used to select the ACRs and bids for audit, nor did CMS document whether or how it met the one-third requirement for contract years 2001 through 2006. Our analysis shows that between 18.6 and 23.6 percent, or fewer than one- third, of the MA organizations (as defined by the number of contracts each year) for contract years 2001 through 2005 were audited each year. Similarly, we determined that only 13.9 percent of the MA organizations and prescription drug plans with approved bids for 2006 were audited, as of the end of our review. Table 1 summarizes our results. As stated earlier, CMS selects organizations to meet the one-third audit requirement based on the number of contracts awarded and not the total number of plans offered under each contract. However, to present additional perspective, we also analyzed the percentage of plans audited of the total number of plans offered by each audited organization. Our analysis shows that with the exception of contract year 2002, the level of audit coverage achieved by CMS audits has progressively decreased in terms of the percentage of plans audited for those organizations that were audited. Audit coverage has also decreased in terms of the percentage of plans audited of all plans offered by participating organizations each contract year. In contract year 2006, a large increase in the number of bid submissions meant that the 159 plans audited reflected only 3.2 percent of all the plans offered. Table 2 summarizes our analysis. Regarding contract years 2001 through 2004, CMS officials told us that they did not know how the MA organizations were selected for audit, and the documentation supporting the selections was either not created or not retained. For contract year 2005 audits, CMS officials told us that the selection criteria included several factors. They said that the criteria considered included whether the MA organization had been audited previously and whether it had significant issues. With respect to contract year 2006, CMS officials acknowledged the one- third requirement, but they stated that they did not intend for the audits of the 2006 bid submissions to meet the one-third audit requirement. They explained that they plan to conduct other reviews of the financial records of MA organizations and prescription drug plans to meet the requirement for 2006. In September 2006, CMS hired a contractor to develop the agency's overall approach to conducting reviews to meet the one-third requirement. Draft audit procedures prepared by the contractor in May 2007, indicate that CMS plans to review solvency, risk scores, related parties, direct medical and administrative costs, and, where relevant, regional preferred provider organizations' (RPPO) cost reconciliation reports for MA bids. For Part D bids, CMS indicated it also plans to review other areas, including beneficiaries' true out-of-pocket costs. However, when our review ended, CMS had not yet clearly laid out how these reviews will be conducted to meet the one-third requirement. Further, CMS is not likely to complete these other financial reviews until almost 3 years after the bid submission date (see figure 1) for each contract year, in part because it must first reconcile payment data that prescription drug plans are not required to submit to CMS until 6 months after the contract year is over. Such an extended cycle for conducting these reviews greatly limits their usefulness to CMS and hinders CMS' ability to recommend and implement timely actions to address identified deficiencies in the MA organizations' and prescription drug plans' bid processes. In its audits for contract years 2001-2005, CMS did not consistently ensure that the audit process provided information needed for assessing the potential impact of errors on beneficiaries' benefits or payments to the MA organizations. The auditors reported findings ranging from lack of supporting documentation to overstating or understating certain costs, but did not identify how the errors affected beneficiary benefits, copayments, or premiums. In addition, although the auditors categorized their results as findings and observations, with findings being more significant, depending on their materiality to the average payment rate reported in the ACR, the distinction between findings and observations, was based on judgment, and therefore varied among the different auditors. In our 2001 report, we reported that CMS planned to require auditors, where applicable, to quantify in their audit reports the overall impact of errors. Further, during the work for the 2001 report, CMS officials stated that they were in the process of determining the impact on beneficiaries and crafting a strategy for audit follow-up and resolution. CMS did not initiate any actions to attempt to determine such impact until after the contract year 2003 audits were completed. CMS took steps to determine such impact and identified a net of about $35 million from the contract year 2003 audits that beneficiaries could have received in additional benefits. The only audit follow-up action that CMS has taken regarding the ACR audits was to provide copies of the audit reports to the MA organizations and instruct them to take action in subsequent ACR filings. In CMS' audits of the 2006 bid submissions, 18 (or about 23 percent) of the 80 organizations audited had material findings that have an impact on beneficiaries or plan payments approved in bids. CMS defined material findings as those that would result in changes in the total bid amount of 1 percent or more or in the estimate for the costs per member per month of 10 percent or more for any bid element. CMS officials told us that they will use the results of the bid audits to help organizations improve their methods in preparing bids in subsequent years and to help improve the overall bid process. Specifically, they told us they could improve the bid forms, bid instructions, training, and bid review process. CMS' audit follow-up process has not involved pursuing financial recoveries from Medicare Advantage organizations based on audit results even when information was available on deficiencies or errors that could impact beneficiaries. CMS officials told us they do not plan to pursue financial recoveries from MA organizations based on the results of ACR or bid audits because the agency does not have the legal authority to do so. According to our assessment of the statutes, CMS has the authority to pursue financial recoveries, but its rights under contracts for 2001 through 2005 are limited because its implementing regulations did not require that each contract include provisions to inform organizations about the audits and about the steps that CMS would take to address identified deficiencies, including pursuit of financial recoveries. Regarding the bid process that began in 2006, our assessment of the statutes is that CMS has the authority to include terms in bid contracts that would allow it to pursue financial recoveries based on bid audit results. CMS also has the authority to sanction organizations, but it has not. CMS officials believe the bid audits provide a "sentinel or deterrent effect" for organizations to properly prepare their bids because they do not know when the bids may be selected for a detailed audit. Given the current audit coverage, CMS is unlikely to achieve significant deterrent effect, however, because only 13.9 percent of participating organizations for contract 2006 have been audited. Appropriate oversight and accountability mechanisms are key to protecting the federal government's interests in using taxpayer resources prudently. When CMS falls short in meeting the statutory audit requirements and in a timely manner resolving the findings arising from those audits, the intended oversight is not achieved and opportunities are lost to determine whether organizations have reasonably estimated the costs to provide benefits to Medicare enrollees. Inaction or untimely audit resolution also undermines the presumed deterrent effect of audit efforts. While the statutory audit requirement does not expressly state the objective of the audits or how CMS should address the results of the audits, the statute does not preclude CMS from including terms in its contracts that allow it to pursue financial recoveries based on audit results. If CMS maintains the view that statute does not allow it to take certain actions, the utility of CMS' efforts is of limited value. In our recent report, we made several recommendations to the CMS Administrator to improve processes and procedures related to its meeting the one-third audit requirement and audit follow-up. We also recommended that CMS amend its implementing regulations for the Medicare Advantage Program and Prescription Drug Program to provide that all contracts CMS enters into with MA organizations and prescription drug plan sponsors include terms that inform these organizations of the audits and give CMS authority to address identified deficiencies, including pursuit of financial recoveries. We further recommended that if CMS does not believe it has the authority to amend its implementing regulations for these purposes, it should ask Congress for express authority to do so. In response to our report, CMS concurred with our recommendations and stated it is in the process of implementing some of our recommendations. For information about this statement, please contact Jeanette Franzel, Director, Financial Management and Assurance, at (202) 512-9471 or [email protected] or James Cosgrove, Acting Director, Health Care, at (202) 512-7029 or [email protected]. Individuals who made key contributions to this testimony include Kimberly Brooks (Assistant Director), Christine Brudevold, Paul Caban, Abe Dymond, Jason Kirwan, and Diane Morris. 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 fiscal year 2006, the Centers for Medicare & Medicaid Services (CMS) estimated it spent over $51 billion on the Medicare Advantage program, which serves as an alternative to the traditional feefor- service program. Under the Medicare Advantage program, CMS approves private companies to offer health plan options to Medicare enrollees that include all Medicare-covered services. Many plans also provide supplemental benefits. The Balanced Budget Act (BBA) of 1997 requires CMS to annually audit the financial records supporting the submissions (i.e., adjusted community rate proposals (ACRP) or bids) of at least onethird of participating organizations. BBA also requires that GAO monitor the audits. This testimony provides information on (1) the ACRP and bid process and related audit requirement, (2) CMS' efforts related to complying with the audit requirement, and (3) factors that cause CMS' audit process to be of limited value. Before 2006, companies choosing to participate in the Medicare Advantage program were annually required to submit an ACRP to CMS for review and approval. In 2006, a bid submission process replaced the ACRP process. The ACRPs and bids identify the health services the company will provide to Medicare members and the estimated cost for providing those services. CMS contracted with accounting and actuarial firms to perform the required audits. According to our analysis, CMS did not meet the requirement for auditing the financial records of at least one-third of the participating Medicare Advantage organizations for contract years 2001-2005. CMS is planning to conduct other financial reviews of organizations to meet the audit requirement for contract year 2006. However, CMS does not plan to complete the financial reviews until almost 3 years after the bid submission date each contract year, which will affect its ability to address any identified deficiencies in a timely manner. CMS did not consistently ensure that the audit process for contract years 2001-2005 provided information to assess the impact on beneficiaries. After contract year 2003 audits were completed, CMS took steps to determine such impact and identified an impact on beneficiaries of about $35 million. CMS audited contract year 2006 bids for 80 organizations, and 18 had a material finding that affected amounts in approved bids. CMS officials took limited action to follow up on contract year 2006 findings. CMS officials told us they do not plan to sanction or pursue financial recoveries based on these audits because the agency does not have the legal authority to do so. According to our assessment of the statutes, CMS had the authority to pursue financial recoveries, but its rights under contracts for 2001-2005 were limited because its implementing regulations did not require that each contract include provisions to inform organizations about the audits and about the steps that CMS would take to address identified deficiencies. Further, our assessment of the statute is that CMS has the authority to include terms in bid contracts that would allow it to pursue financial recoveries. Without changes in its procedures, CMS will continue to invest resources in audits that will likely provide limited value.
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Our recent analyses of NRC programs identified several areas where NRC needs to take action to better fulfill its mission and made associated recommendations for improvement. With respect to NRC's security mission, we found that the security of sealed radioactive sources and the physical security at nuclear power plants need to be strengthened. With respect to its public health and safety, and environmental missions, we found several shortcomings that need to be addressed. NRC's analyses of plant owners' contributions could be improved to better ensure that adequate funds are accumulating for the decommissioning of nuclear power plants. By contrast, we found that NRC is ensuring that requirements for liability insurance for nuclear power plants owned by limited liability companies are being met. Further, to ensure the safety of nuclear power plants NRC must more aggressively and comprehensively resolve oversight issues related to the shutdown of the Davis-Besse plant. Finally, NRC's methods of ensuring that power plants are effectively controlling spent nuclear fuel need to be improved. In August 2003, we reported on federal and state actions needed to improve security of sealed radioactive sources. Sealed radioactive sources, radioactive material encapsulated in stainless steel or other metal, are used worldwide in medicine, industry, and research. These sealed sources could be a threat to national security because terrorists could use them to make "dirty bombs." We were asked among other things to determine the number of sealed sources in the United States. We found that the number of sealed sources in use today in the United States is unknown primarily because no state or federal agency tracks individual sealed sources. Instead, NRC and the agreement states track numbers of specific licensees. NRC and the Department of Energy (DOE) have begun to examine options for developing a national tracking system, but to date, this effort has had limited involvement by the agreement states. NRC had difficulty locating owners of certain generally licensed devices it began tracking in April 2001, and has hired a private investigation firm to help locate them. Twenty-five of the 31 agreement states that responded to our survey indicated that they track some or all general licensees or generally licensed devices, and 17 were able to provide data on the number of generally licensed devices in their jurisdictions, totaling approximately 17,000 devices. GAO recommended that NRC (1) collaborate with states to determine the availability of the highest risk sealed sources, (2) determine if owners of certain devices should apply for licenses, (3) modify NRC's licensing process so sealed sources cannot be purchased until NRC verifies their intended use, (4) ensure that NRC's evaluation of federal and state programs assesses the security of sealed sources, and (5) determine how states can participate in implementing additional security measures. NRC disagreed with some of our findings. In September 2003, we reported that NRC's oversight of security at commercial nuclear power plants needed to be strengthened. The September 11, 2001, terrorist attacks intensified the nation's focus on national preparedness and homeland security. Among possible terrorist targets are the nation's nuclear power plants which contain radioactive fuel and waste. NRC oversees plant security through an inspection program designed to verify the plants' compliance with security requirements. As part of that program, NRC conducted annual security inspections of plants and force-on-force exercises to test plant security against a simulated terrorist attack. GAO was asked to review (1) the effectiveness of NRC's security inspection program and (2) legal challenges affecting power plant security. At the time of our review, NRC was reevaluating its inspection program. We did not assess the adequacy of security at the individual plants; rather, our focus was on NRC's oversight and regulation of plant security. We found that NRC had taken numerous actions to respond to the heightened risk of terrorist attack, including interacting with the Department of Homeland Security and issuing orders designed to increase security and improve defensive barriers at plants. However, three aspects of NRC's security inspection program reduced the agency's effectiveness in overseeing security at commercial nuclear power plants. First, NRC inspectors often used a process that minimized the significance of security problems found in annual inspections by classifying them as "non-cited violations" if the problem had not been identified frequently in the past or if the problem had no direct, immediate, adverse consequences at the time it was identified. Non-cited violations do not require a written response from the licensee and do not require NRC inspectors to verify that the problem has been corrected. For example, guards at one plant failed to physically search several individuals for metal objects after a walk-through detector and a hand-held scanner detected metal objects in their clothing. These individuals were then allowed unescorted access throughout the plant's protected area. By extensively using non-cited violations for serious problems, NRC may overstate the level of security at a power plant and reduce the likelihood that needed improvements are made. Second, NRC did not have a routine, centralized process for collecting, analyzing, and disseminating security inspections data to identify problems that may be common to plants or to provide lessons learned in resolving security problems. Such a mechanism may help plants improve their security. Third, although NRC's force-on-force exercises can demonstrate how well a nuclear plant might defend against a real-life threat, several weaknesses in how NRC conducted these exercises limited their usefulness. Weaknesses included (1) using more personnel to defend the plant during these exercises than during normal operations, (2) using attacking forces that are not trained in terrorist tactics, and (3) using unrealistic weapons (rubber guns) that do not simulate actual gunfire. Furthermore, at the time, NRC has made only limited use of some available improvements that would make force-on-force exercises more realistic and provide a more useful learning experience. Finally, we also found that even if NRC strengthens its inspection program, commercial nuclear power plants face legal challenges in ensuring plant security. First, federal law generally prohibits guards at these plants from using automatic weapons, although terrorists are likely to have them. As a result, guards at commercial nuclear power plants could be at a disadvantage in firepower, if attacked. Second, state laws regarding the permissible use of deadly force and the authority to arrest and detain intruders vary, and guards were unsure about the extent of their authorities and may hesitate or fail to act if the plant is attacked. GAO made recommendations to promptly restore annual security inspections and revise force-on-force exercises. NRC disagreed with many of GAO's findings, but did not comment on GAO's recommendations. In September 2004, we testified on our preliminary observations regarding NRC's efforts to improve security at nuclear power plants. The events of September 11, 2001, and the subsequent discovery of commercial nuclear power plants on a list of possible terrorist targets have focused considerable attention on plants' capabilities to defend against a terrorist attack. NRC is responsible for regulating and overseeing security at commercial nuclear power plants. We were asked to review (1) NRC's efforts since September 11, 2001, to improve security at nuclear power plants, including actions NRC had taken to implement some of GAO's September 2003 recommendations to improve security oversight, and (2) the extent to which NRC is in a position to assure itself and the public that the plants are protected against terrorist attacks. The testimony reflected the preliminary results of GAO's review. We are currently performing a more comprehensive review in which we are examining (1) NRC's development of its 2003 design basis threat (DBT), which establishes the maximum terrorist threat that commercial nuclear power plants must defend against, and (2) the security enhancements that plants have put in place in response to the design basis threat and related NRC requirements. We expect to issue a report on our findings later this year. In the earlier work, we found that NRC responded quickly and decisively to the September 11, 2001, terrorist attacks with multiple steps to enhance security at commercial nuclear power plants. NRC immediately advised plants to go to the highest level of security using the system in place at the time, and issued advisories and orders for plants to make certain enhancements, such as installing more physical barriers and augmenting security forces, which could be quickly completed to shore up security. According to NRC officials, their inspections found that plants complied with these advisories and orders. Later, in April 2003, NRC issued a new DBT and required the plants to develop and implement new security plans to address the new threat by October 2004. NRC is also improving its force-on-force exercises, as GAO recommended in its September 2003 report. While its efforts had enhanced security, NRC was not yet in a position to provide an independent determination that each plant has taken reasonable and appropriate steps to protect against the new DBT. According to NRC officials, the facilities' new security plans were on schedule to be implemented by October 2004. However, NRC's review of the plans, which are not available to the general public for security reasons, had primarily been a paper review and was not detailed enough for NRC to determine if the plans would protect the facility against the threat presented in the DBT. In addition, NRC officials generally were not visiting the facilities to obtain site-specific information and assess the plans in terms of each facility's design. NRC is largely relying on the force- on-force exercises it conducts to test the plans, but these exercises will not be conducted at all facilities for 3 years. We also found that NRC did not plan to make some improvements in its inspection program that GAO previously recommended. For example, NRC was not following up to verify that all violations of security requirements had been corrected, nor was the agency taking steps to make "lessons learned" from inspections available to other NRC regional offices and nuclear power plants. In October 2003, we reported that NRC needs to more effectively analyze whether nuclear power plant owners are adequately accumulating funds for decommissioning plants. Following the closure of a nuclear power plant, a significant radioactive waste hazard remains until the waste is removed and the plant site is decommissioned. In 1988, NRC began requiring owners to (1) certify that sufficient financial resources would be available when needed to decommission their nuclear power plants and (2) require them to make specific financial provisions for decommissioning. In 1999, GAO reported that the combined value of the owners' decommissioning funds was insufficient to ensure enough funds would be available for decommissioning. GAO was asked to update its 1999 report, and to evaluate NRC's analysis of the owners' funds and the agency's process for acting on reports that show insufficient funds. We found that although the collective status of the owners' decommissioning fund accounts has improved considerably since GAO's last report, some individual owners were not on track to accumulate sufficient funds for decommissioning. Based on our analysis and using the most likely economic assumptions, we concluded that the combined value of nuclear power plant owners' decommissioning fund accounts in 2000-- about $26.9 billion--was about 47 percent greater than needed at that point to ensure that sufficient funds would be available to cover the approximately $33 billion in estimated decommissioning costs when the plants are permanently closed. This value contrasts with GAO's prior finding that 1997 account balances were collectively 3 percent below what was needed. However, overall industry results can be misleading. Because funds are generally not transferable from funds that have more than sufficient reserves to those with insufficient reserves, each individual owner must ensure that enough funds are available for decommissioning their particular plants. We found that 33 owners with ownership interests in a total of 42 plants had accumulated fewer funds than needed through 2000, to be on track to pay for eventual decommissioning. In addition, 20 owners with ownership interests in a total of 31 plants recently contributed less to their trust funds than we estimated they needed in order to put them on track to meet their decommissioning obligations. NRC's analysis of the owners' 2001 biennial reports was not effective in identifying owners that might not be accumulating sufficient funds to cover their eventual decommissioning costs. In reviewing the 2001 reports, NRC reported that all owners appeared to be on track to have sufficient funds for decommissioning. In reaching this conclusion, NRC relied on the owners' future plans for fully funding their decommissioning obligations. However, based on the owners' actual recent contributions, and using a different method, GAO found that several owners could be at risk of not meeting their financial obligations for decommissioning when these plants stop operating. In addition, for plants with more than one owner, NRC did not separately assess the status of each co-owner's trust funds against each co-owner's contractual obligation to fund decommissioning. Instead, NRC assessed whether the combined value of the trust funds for the plant as a whole were reasonable. Such an assessment for determining whether owners are accumulating sufficient funds can produce misleading results because owners with more than sufficient funds can appear to balance out owners with less than sufficient funds, even though funds are generally not transferable among owners. Furthermore, we found that NRC had not established criteria for taking action when it determines that an owner is not accumulating sufficient decommissioning funds. We recommended that NRC (1) develop an effective method for determining whether owners are accumulating decommissioning funds at sufficient rates and (2) establish criteria for taking action when it is determined that an owner is not accumulating sufficient funds. NRC disagreed with these recommendations, suggesting that its method is effective and that it is better to deal with unacceptable levels of financial assurance on a case-by-case basis. GAO continues to believe that limitations in NRC's method reduce its effectiveness and that, without criteria, NRC might not be able to ensure owners are accumulating decommissioning funds at sufficient rates. In May 2004, we issued a report on NRC's liability insurance requirements for nuclear power plants owned by limited liability companies. An accident at one the nation's commercial nuclear power plants could result in personal injury and property damage. To ensure that funds would be available to settle liability claims in such cases, the Price-Anderson Act requires licensees of these plants to have primary insurance--currently $300 million per site. The act also requires secondary coverage in the form of retrospective premiums to be contributed by all licensees of nuclear power plants to cover claims that exceed primary insurance. If these premiums are needed, each licensee's payments are limited to $10 million per year and $95.8 million in total for each of its plants. In recent years, limited liability companies have increasingly become licensees of nuclear power plants, raising concerns about whether these companies--which shield their parent corporations' assets--will have the financial resources to pay their retrospective premiums. We were asked to determine (1) the extent to which limited liability companies are the licensees for U.S. commercial nuclear power plants, (2) NRC's requirements and procedures for ensuring that licensees of nuclear power plants comply with the Price- Anderson Act's liability requirements, and (3) whether and how these procedures differ for licensees that are limited liability companies. We found that of the 103 operating nuclear power plants, 31 were owned by 11 limited liability companies. Three energy corporations--Exelon, Entergy, and the Constellation Energy Group--were the parent companies for eight of these limited liability companies. These 8 subsidiaries were the licensees or co-licensees for 27 of the 31 plants. We also found that NRC requires all licensees for nuclear power plants to show proof that they have the primary and secondary insurance coverage mandated by the Price-Anderson Act. Licensees sign an agreement with NRC that requires the licensee to keep the insurance in effect. American Nuclear Insurers also has a contractual agreement with each of the licensees that obligates the licensee to pay the retrospective premiums to American Nuclear Insurers if these payments become necessary. A certified copy of this agreement, which is called a bond for payment of retrospective premiums, is provided to NRC as proof of secondary insurance. Finally, we found that NRC does not treat limited liability companies differently than other licensees with respect to the Price-Anderson Act's insurance requirements. Like other licensees, limited liability companies must show proof of both primary and secondary insurance coverage. American Nuclear Insurers also requires limited liability companies to provide a letter of guarantee from their parent or other affiliated companies with sufficient assets to pay the retrospective premiums. These letters state that the parent or affiliated companies are responsible for paying the retrospective premiums if the limited liability company does not. American Nuclear Insurers informs NRC that it has received these letters. In May 2004, we also issued a report documenting the need for NRC to more aggressively and comprehensively resolve issues related to the shutdown of the Davis-Besse nuclear power plant. The most serious safety issue confronting the nation's commercial nuclear power industry since Three Mile Island in 1979, was identified at the Davis-Besse plant in Ohio in March of 2002. After NRC allowed Davis-Besse to delay shutting down to inspect its reactor vessel for cracked tubing, the plant found that leakage from these tubes had caused extensive corrosion on the vessel head--a vital barrier in preventing a radioactive release. GAO determined (1) why NRC did not identify and prevent the corrosion, (2) whether the process NRC used in deciding to delay the shutdown was credible, and (3) whether NRC is taking sufficient action in the wake of the incident to prevent similar problems from developing at other plants. We found that NRC should have, but did not identify or prevent the corrosion at Davis- Besse because agency oversight did not produce accurate information on plant conditions. NRC inspectors were aware of indications of leaking tubes and corrosion; however, the inspectors did not recognize the importance of the indications and did not fully communicate information about them to other NRC staff. NRC also considered FirstEnergy--Davis-Besse's owner--a good performer, which resulted in fewer NRC inspections and questions about plant conditions. NRC was aware of the potential for cracked tubes and corrosion at plants like Davis- Besse but did not view them as an immediate concern. Thus, despite being aware of the development of potential problems, NRC did not modify its inspection activities to identify such conditions. Additionally, NRC's process for deciding to allow Davis-Besse to delay its shutdown lacked credibility. Because NRC had no guidance for making the specific decision of whether a plant should shut down, it instead used guidance for deciding whether a plant should be allowed to modify its operating license. However, NRC did not always follow this guidance and generally did not document how it applied the guidance. Furthermore, the risk estimate NRC used to help decide whether the plant should shut down was also flawed and underestimated the risk that Davis-Besse posed. Finally, even though it underestimated the risk posed by Davis-Besse, the risk estimate applied to the plant still exceeded levels generally accepted by the agency. Nevertheless, Davis-Besse was allowed to delay the plant's shutdown. After this incident, NRC took several significant actions to help prevent reactor vessel corrosion from recurring at nuclear power plants. For example, NRC has required more extensive vessel examinations and augmented inspector training. I would also like to note that, in April 2005, NRC proposed a $5.45 million fine against the licensee of the Davis-Besse plant. The principal violation was that the utility restarted and operated the plant in May 2000, without fully characterizing and eliminating leakage from the reactor vessel head. Additional violations included providing incomplete and inaccurate information to NRC on the extent of cleaning and inspecting the reactor vessel head in 2000. While NRC has not yet completed all of its planned actions, we remain concerned that NRC has no plans to address three systemic weaknesses underscored by the incident at Davis-Besse. Specifically, NRC has proposed no actions to help it better (1) identify early indications of deteriorating safety conditions at plants, (2) decide whether to shut down a plant, or (3) monitor actions taken in response to incidents at plants. Both NRC and GAO had previously identified problems in NRC programs that contributed to the Davis-Besse incident, yet these problems continued to persist. Because the nation's nuclear power plants are aging, GAO recommended that NRC take more aggressive actions to mitigate the risk of serious safety problems occurring at Davis-Besse and other nuclear power plants. In April 2005, we issued a report outlining the need for NRC to do more to ensure that power plants are effectively controlling spent nuclear fuel. Spent nuclear fuel--the used fuel periodically removed from reactors in nuclear power plants--is too inefficient to power a nuclear reaction, but is intensely radioactive and continues to generate heat for thousands of years. Potential health and safety implications make the control of spent nuclear fuel of great importance. The discovery, in 2004, that spent fuel rods were missing at the Vermont Yankee plant in Vermont generated public concern and questions about NRC's regulation and oversight of this material. GAO reviewed (1) plants' performance in controlling and accounting for their spent nuclear fuel, (2) the effectiveness of NRC's regulations and oversight of plants' performance, and (3) NRC's actions to respond to plants' problems controlling their spent fuel. We found that nuclear power plants' performance in controlling and accounting for their spent fuel has been uneven. Most recently, three plants--Vermont Yankee and Humboldt Bay (California) in 2004, and Millstone (Connecticut) in 2000--have reported missing spent fuel. Earlier, several other plants also had missing or unaccounted for spent fuel rods or rod fragments. NRC regulations require plants to maintain accurate records of their spent nuclear fuel and to conduct a physical inventory of the material at least once a year. The regulations, however, do not specify how physical inventories are to be conducted. As a result, plants differ in the regulations' implementation. For example, physical inventories at plants varied from a comprehensive verification of the spent fuel to an office review of the records and paperwork for consistency. Additionally, NRC regulations do not specify how individual fuel rods or segments are to be tracked. As a result, plants employ various methods for storing and accounting for this material. Further, NRC stopped inspecting plants' material control and accounting programs in 1988. According to NRC officials, there was no indication that inspections of these programs were needed until the event at Millstone. At the time of our review, NRC was collecting information on plants' spent fuel programs to decide if it needs to revise its regulations and/or oversight. It had its inspectors collect basic information on all facilities' programs. It also contracted with the Department of Energy's Oak Ridge National Laboratory in Tennessee to review NRC's material control and accounting programs for nuclear material. NRC is planning to request information from plants and plans to visit over a dozen plants for more detailed inspection. The results of these efforts may not be completed until late 2005, over 5 years after the incident at Millstone that initiated NRC's efforts. However, we believed NRC has already collected considerable information indicating problems or weaknesses in plants' material control and accounting programs for spent fuel. GAO recommended that NRC (1) establish specific requirements for the way plants control and account for loose rods and fragments as well as conduct their physical inventories, and (2) develop and implement appropriate inspection procedures to verify plants' compliance with the requirements. Based on our recent work at NRC, we have identified several cross-cutting challenges that NRC faces as it works to effectively regulate and oversee the nuclear power industry. First, NRC must manage the implementation of its risk-informed regulatory strategy across the agency's operations. Second, and relatedly, NRC must strive to achieve the appropriate balance between more direct involvement in the operations of nuclear power plants and self-reliance and self-reporting on the part of plant operators to do the right things to ensure safety. Third, and finally, NRC must ensure that the agency effectively manages resources to implement its risk- informed strategy and achieve the appropriate regulatory balance in the current context of increasing regulatory and oversight demands as the industry's interest in expansion grows. Nuclear power plants have many physical structures, systems, and components, and licensees have numerous activities under way, 24-hours a day, to ensure that plants operate safely. NRC relies on, among other things, the agency's on-site resident inspectors to assess plant conditions and oversee quality assurance programs, such as maintenance and operations, established by operators to ensure safety at the plants. Monitoring, maintenance, and inspection programs are used to ensure quality assurance and safe operations. To carry out these programs, licensees typically prepare numerous reports describing conditions at plants that need to be addressed to ensure continued safe operations. Because of the significant number of activities and physical structures, systems, and components, NRC adopted a risk-informed strategy to focus inspections on those activities and pieces of equipment that are considered to be the most significant for protecting public health and safety. Under the risk-informed approach, some systems and activities that NRC considers to have relatively less safety significance receive little agency oversight. With its current resources, NRC can inspect only a relatively small sample of the numerous activities going on during complex plant operations. NRC has adopted a risk-informed approach because it believes that it can focus its regulatory resources on those areas of the plant that the agency considers the most important to safety. NRC has stated the adoption of this approach was made possible by the fact that safety performance at plants has improved as a result of more than 25 years of operating experience. Nevertheless, we believe that NRC faces a significant challenge in effectively implementing its risk-informed strategy, especially with regards to improving the quality of its risk information and identifying emerging technical issues and adjusting regulatory requirements before safety problems develop. The 2002 shutdown of the Davis-Besse plant illustrates this challenge, notably the shortcomings in NRC's risk estimate and failure to sufficiently address the boric acid corrosion and nozzle cracking issues. We also note that NRC's Inspector General considers the development and implementation of a risk-informed regulatory oversight strategy to be one of the most serious management challenges facing NRC. Under the Atomic Energy Act of 1954, as amended, and the Energy Reorganization Act of 1974, as amended, NRC and the operators of nuclear power plants share the responsibility for ensuring that nuclear reactors are operated safely. NRC is responsible for issuing regulations, licensing and inspecting plants, and requiring action, as necessary, to protect public health and safety. Plant operators have the primary responsibility for safely operating their plants in accordance with their licenses. NRC has the authority to take actions, up to and including shutting down a plant, if licensing conditions are not being met and the plant poses an undue risk to public health and safety. NRC has sought to strike a balance between verifying plants' compliance with requirements through inspections and affording licensees the opportunity to demonstrate that they are operating their plants safely. While NRC oversees processes, such as the use of performance measures and indicators, and requirements that licensees maintain their own quality assurance programs, NRC, in effect, relies on licensees and trusts them to a large extent to make sure their plants are operated safely. While this approach has generally worked, we believe that NRC still has work to do to effectively position itself so that it can identify problems with diminishing performance at individual plants before they become serious. For example, incidents such as the 2002 discovery of the extensive reactor vessel head corrosion at the Davis-Besse plant and the unaccounted for spent nuclear fuel at several plants across the country, raise questions about whether NRC is appropriately balancing agency involvement and self-monitoring by licensees. An important aspect of NRC's ability to rely on licensees to maintain their own quality assurance programs is a mechanism to identify deteriorating performance at a plant before the plant becomes a problem. At Davis-Besse, NRC inspectors viewed the licensee as a good performer based on its past performance and did not ask the questions that should have been asked about plant conditions. Consequently, the inspectors did not make sure that the licensee adequately investigated the indications of the problem and did not fully communicate the indications to the regional office and NRC headquarters. Finally, Mr. Chairman, I would also like to comment briefly on NRC's resources. While we have not assessed the adequacy of NRC's resources, we have noted instances, such the shutdown of the Davis-Besse plant, where resource constraints affected the agency's oversight or delayed certain activities. NRC's resources have been challenged by the need to enhance security at nuclear power plants after the September 11, 2001, terrorist attacks, and they will continue to be challenged as the nation's fleet of nuclear power plants age and the industry's interest grows in both licensing and constructing new plants, and re-licensing and increasing the output of existing plants. Resource demands will also increase when the Department of Energy submits for NRC review, an application to construct and operate a national depository for high-level radioactive waste currently planned for Yucca Mountain, Nevada. We believe that it is important for NRC and the Congress to monitor agency resources as these demands arise in order to ensure that NRC can meet all of its regulatory and oversight responsibilities and fulfill its mission to ensure adequate protection of public health, safety, and the environment. In closing, we recognize and appreciate the complexities of NRC's regulatory and oversight efforts required to ensure the safe and secure operation of the nation's commercial nuclear power plants. As GAO's recent work has demonstrated, NRC does a lot right but it still has important work to do. Whether NRC carries out its regulatory and oversight responsibilities in an effective and credible manner will have a significant impact on the future direction of our nation's use of nuclear power. Finally, we note that NRC has generally been responsive to our report findings. Although the agency does not always agree with our specific recommendations, it has continued to work to improve in the areas we have identified. It has implemented many of our recommendations and is working on others. For example, with respect to nuclear power plant security, NRC has restored its security inspection program and resumed its force-on-force exercises with a much higher level of intensity. It is also strengthening these exercises by conducting them at individual plants every 3 years rather than every 8 years, and is using laser equipment to reduce the exercises' artificiality. Another example involves sealed radioactive sources. NRC is working with agreement states to develop a process for ensuring that high-risk radioactive sources cannot be obtained before verification that the materials will be used as intended. NRC anticipates that an NRC-agreement state working group will deliver a recommended approach to NRC senior management later this year. In addition, NRC continues to work on its broader challenges. For example, the agency intends to develop additional regulatory guidance to expand the application of risk-informed decision making, including addressing the need to establish quality requirements for risk information and specific instructions for documenting the decision making process and its conclusions. We will continue to track NRC's progress in implementing our recommendations. In addition, as members of this subcommittee are aware, GAO has been asked to review the effectiveness of NRC's activities for overseeing nuclear power plants, that is, its reactor oversight process. An important part of that work would be to review the agency's risk- informed regulatory strategy and its effectiveness in identifying deteriorating plant performance as well as whether NRC is making progress toward effectively balancing agency inspections and self- monitoring by licensees. Mr. Chairman, this completes my prepared statement. I would be pleased to respond to any questions that you or other Members of the subcommittee may have. For further information about this testimony, please contact me at (202) 512-3841 (or at [email protected]). John W. Delicath, Ilene Pollack, and Raymond H. Smith, Jr. made key contributions to this testimony. Nuclear Waste: Preliminary Observations on the Quality Assurance Program at the Yucca Mountain Repository. GAO-03-826T. Washington, D.C.: May 28, 2003. Nuclear Regulatory Commission: Revision of Fee Schedules; Fee Recovery for FY 2003. GAO-03-934R. Washington, D.C.: June 30, 2003. Spent Nuclear Fuel: Options Exist to Further Enhance Security. GAO-03- 426. Washington, D.C.: July 15, 2003. Nuclear Security: Federal and State Action Needed to Improve Security of Sealed Radioactive Sources. GAO-03-804. Washington, D.C.: August 6, 2003. Nuclear Regulatory Commission: Oversight of Security at Commercial Nuclear Power Plants Needs to Be Strengthened. GAO-03-752. Washington, D.C.: September 4, 2003. Nuclear Regulation: NRC Needs More Effective Analysis to Ensure Accumulation of Funds to Decommission Nuclear Power Plants. GAO-04- 32. Washington, D.C.: October 30, 2003. Information Technology Management: Governmentwide Strategic Planning, Performance Measurement, and Investment Management Can Be Further Improved. GAO-04-49. Washington, D.C.: January 12, 2004. Yucca Mountain: Persistent Quality Assurance Problems Could Delay Repository Licensing and Operation. GAO-04-460. Washington, D.C.: April 30, 2004. Nuclear Regulation: NRC Needs to More Aggressively and Comprehensively Resolve Issues Related to the Davis-Besse Nuclear Power Plant's Shutdown. GAO-04-415. Washington, D.C.: May 17, 2004. Nuclear Regulation: NRC's Liability Insurance Requirements for Nuclear Power Plants Owned by Limited Liability Companies. GAO-04- 654. Washington, D.C.: May 28, 2004. Low-Level Radioactive Waste: Disposal Availability Adequate in the Short Term, but Oversight Needed to Identify Any Future Shortfalls. GAO-04-604. Washington, D.C.: June 10, 2004. Nuclear Nonproliferation: DOE Needs to Take Action to Further Reduce the Use of Weapons-Usable Uranium in Civilian Research Reactors. GAO-04-807. Washington, D.C.: July 30, 2004. Nuclear Regulatory Commission: Preliminary Observations on Efforts to Improve Security at Nuclear Power Plants. GAO-04-1064T. Washington, D.C.: September 14, 2004. Low-Level Radioactive Waste: Future Waste Volumes and Disposal Options Are Uncertain. GAO-04-1097T. Washington, D.C.: September 30, 2004. Nuclear Regulatory Commission: NRC Needs to Do More to Ensure that Power Plants Are Effectively Controlling Spent Nuclear Fuel. GAO-05- 339. Washington, D.C.: April 8, 2005. 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 Nuclear Regulatory Commission (NRC) has the regulatory responsibility to, among other things, ensure that the nation's 103 commercial nuclear power plants are operated in a safe and secure manner. While the nuclear power industry's overall safety record has been good, safety issues periodically arise that threaten the credibility of NRC's regulation and oversight of the industry. Recent events make the importance of NRC's regulatory and oversight responsibilities readily apparent. The terrorist attacks on September 11, 2001, focused attention on the security of facilities such as commercial nuclear power plants, while safety concerns were heightened by shutdown of the Davis-Besse nuclear power plant in Ohio in 2002, and the discovery of missing or unaccounted for spent nuclear fuel at three nuclear power plants. GAO has issued a total of 15 recent reports and testimonies on a wide range of NRC activities. This testimony (1) summarizes GAO's findings and associated recommendations for improving NRC mission-related activities and (2) presents several cross-cutting challenges NRC faces in being an effective and credible regulator of the nuclear power industry. GAO has documented many positive steps taken by NRC to advance the security and safety of the nation's nuclear power plants. It has also identified various actions that NRC needs to take to better carry out its mission. First, with respect to its security mission, GAO found that NRC needs to improve security measures for sealed sources of radioactive materials---radioactive material encapsulated in stainless steel or other metal used in medicine, industry, and research--which could be used to make a "dirty bomb." GAO also found that, although NRC was taking numerous actions to require nuclear power plants to enhance security, NRC needed to strengthen its oversight of security at the plants. Second, with respect to its public health and safety, and environmental missions, GAO found that NRC needs to conduct more effective analyses of plant owners' funding for decommissioning to ensure that the significant volume of radioactive waste remaining after the permanent closure of a plant are properly disposed. Further, NRC needs to more aggressively and comprehensively resolve issues that led to the shutdown of the Davis-Besse nuclear power plant by improving its oversight of plant safety conditions. Finally, NRC needs to do more to ensure that power plants are effectively controlling spent nuclear fuel, including developing and implementing appropriate inspection procedures. GAO has identified several cross-cutting challenges affecting NRC's ability to effectively and credibly regulate the nuclear power industry. Recently, NRC has taken two overarching approaches to its regulatory and oversight responsibilities. These approaches are to (1) develop and implement a risk-informed regulatory strategy that targets the most important safety-related activities and (2) strike a balance between verifying plants' compliance with requirements through inspections and affording licensees the opportunity to demonstrate that they are operating their plants safety. NRC must overcome significant obstacles to fully implement its risk-informed regulatory strategy across agency operations, especially with regards to developing the ability to identify emerging technical issues and adjust regulatory requirements before safety problems develop. NRC also faces inherent challenges in achieving the appropriate balance between more direct oversight and industry self-compliance. Incidents such as the 2002 shutdown of the Davis-Besse plant and the unaccounted for spent nuclear fuel at several plants raise questions about whether NRC has the risk information that it needs and whether it is appropriately balancing agency involvement and licensee self-monitoring. Finally, GAO believes that NRC will face challenges managing its resources while meeting increasing regulatory and oversight demands. NRC's resources have already been stretched by the extensive effort to enhance security at plants in the wake of the September 11, 2001, terrorist attacks. Pressure on NRC's resources will continue as the nation's fleet of plants age and the industry's interest in expansion grows, both in licensing and constructing new plants, and re-licensing and increasing the power output of existing ones.
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The financial statements including the accompanying notes present fairly, in all material respects, in accordance with generally accepted accounting principles, the Resolution Trust Corporation's assets, liabilities, and equity; revenues, expenses, and accumulated deficit; and cash flows. However, misstatements may nevertheless occur in other RTC-related financial information as a result of the internal control weakness described below. We evaluated RTC management's assertion about the effectiveness of its internal controls designed to safeguard assets against loss from unauthorized acquisition, use, or assure the execution of transactions in accordance with management's authority and with laws and regulations that have a direct and material effect on the financial statements; and properly record, process, and summarize transactions to permit the preparation of reliable financial statements and to maintain accountability for assets. RTC management fairly stated that those controls in place on December 31, 1995, provided reasonable assurance that losses, noncompliance, or misstatements material in relation to the financial statements would be prevented or detected on a timely basis. RTC management made this assertion, which is included in appendix II, based upon criteria established under the Federal Managers' Financial Integrity Act of 1982 (FMFIA). RTC management, in making its assertion, recognized the need to improve internal controls. Our work also identified the need to improve internal controls, as described in the following section. The weakness in internal controls, although not considered a material weakness, represents a significant deficiency in the design or operation of internal controls which could have adversely affected RTC's ability to fully meet the internal control objectives listed above. RTC acted during 1995 to resolve the reportable condition related to the weaknesses in general controls over some computerized information systems identified in our audit of its 1994 financial statements. However, as reported by RTC, many of those corrective actions were not completed until late in 1995. In addition, our audit of RTC's 1995 financial statements identified additional weaknesses related to general controls over its computerized systems such that this reportable condition continued to exist. Because RTC relied on its computerized information systems extensively, both in its daily operations and in processing and reporting financial information, the effectiveness of general controls is a significant factor in ensuring the integrity and reliability of financial data. Because corrective actions for many of the general control weaknesses identified in our 1995 and 1994 audits were not implemented until late 1995 and early 1996, our audit found that general controls still did not provide adequate assurance that some of RTC data files and computer programs were fully protected from unauthorized access and modification. In response to the weaknesses we identified, RTC and FDIC developed action plans to address the weaknesses. Prior to the completion of our audit work on June 7, 1996, FDIC reported that most of the corrective actions had been implemented, with those remaining scheduled for implementation by September 30, 1996. We plan to evaluate the effectiveness of the corrective actions as part of our 1996 audit of FDIC. During 1995, RTC performed accounting and control procedures, such as reconciliations and manual comparisons, which would have detected material data integrity problems resulting from inadequate general controls. Without these procedures, weaknesses in the general controls would raise significant concern over the integrity of the information obtained from the affected systems. Other less significant matters involving the internal control structure and its operation noted during our audit will be communicated separately to FDIC's management, which assumed responsibility for RTC's remaining assets and liabilities since RTC's termination on December 31, 1995. Our tests for compliance with selected provisions of laws and regulations disclosed no instances of noncompliance that would be reportable under generally accepted government auditing standards. However, the objective of our audit was not to provide an opinion on the overall compliance with laws and regulations. Accordingly, we do not express such an opinion. With the termination of RTC's operations on December 31, 1995, a significant phase of the savings and loan crisis has ended. The following sections present an historical perspective on the savings and loan crisis and RTC's role in resolving the crisis. Specifically, the information describes (1) background on the savings and loan crisis and the creation of RTC, (2) the completion of RTC's mission, (3) RTC's estimated costs and funding, (4) RTC's controls over contracting, (5) the cost of resolving the savings and loan crisis, and (6) remaining fiscal implications of the crisis. During the 1980s, the savings and loan industry experienced severe financial losses because extremely high interest rates caused institutions to pay high rates on deposits and other funds while earning low yields on their long-term loan portfolios. During this period, regulators reduced capital standards and allowed the use of alternative accounting procedures to increase reported capital levels. While these conditions were occurring, institutions were allowed to diversify their investments into potentially more profitable, but risky, activities. The profitability of many of these activities depended heavily on continued inflation in real estate values to make them economically viable. In many cases, diversification was accompanied by inadequate internal controls and noncompliance with laws and regulations, thus further increasing the risk of these activities. As a result of these factors, many institutions experienced substantial losses on their loans and investments, a condition that was made worse by an economic downturn. Faced with increasing losses, the industry's insurance fund, the Federal Savings and Loan Insurance Corporation (FSLIC), began incurring losses in 1984. By the end of 1987, 505 savings and loan institutions were insolvent. The industry's deteriorating financial condition overwhelmed the insurance fund which only 7 years earlier reported insurance reserves of $6.5 billion. In 1987, the Congress responded by creating the Financing Corporation (FICO) to provide financing to the FSLIC through the issuance of bonds. Through August 8, 1989, FICO provided $7.5 billion in financing to the FSLIC; however, the insurance fund required far greater funding to deal with the industry's problems. In response to the worsening savings and loan crisis, the Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) on August 9, 1989. FIRREA abolished FSLIC and transferred its assets, liabilities, and operations to the newly-created FSLIC Resolution Fund (FRF) to be administered by the FDIC. In addition, FIRREA created a new insurance fund, the Savings Association Insurance Fund (SAIF). FIRREA also created the RTC to resolve all troubled institutions placed into conservatorship or receivership from January 1, 1989, through June 30, 1995. RTC's overall responsibilities included managing and disposing of receivership assets and recovering taxpayer funds. In 1993, the Resolution Trust Corporation Completion Act required RTC to cease its operations on or before December 31, 1995, and transfer any remaining assets and liabilities to the FSLIC Resolution Fund. FIRREA provided RTC with a total of $50 billion in funding to resolve failed institutions and pay related expenses. FIRREA also established the Resolution Funding Corporation (REFCORP) to provide RTC with $30 billion of the $50 billion in funding through the issuance of bonds. However, funding provided to RTC by FIRREA was not sufficient and the Congress enacted subsequent legislation resulting in a total of $105 billion being made available to RTC to cover losses associated with resolutions. RTC closed 747 institutions with $402 billion in book value of assets when they entered the conservatorship phase. During conservatorship, assets were reduced by $162 billion to $240 billion through sales, collections, and other adjustments. In the receivership phase, assets were further reduced by $232 billion. Thus, at December 31, 1995, RTC assets in liquidation totaled approximately $8 billion. The remaining assets were transferred to the FSLIC Resolution Fund effective January 1, 1996. RTC also fulfilled the government's pledge to insured depositors by protecting 25 million depositor accounts. Of the $277 billion in liabilities at resolution, approximately $221 billion represented liabilities to depositors. At resolution, RTC generally transferred the deposit liabilities, along with the required funding, to one or more healthy acquiring institutions. During the receivership phase, RTC used asset recoveries to pay the remaining creditors, and to recover a portion of the amount it advanced to cover deposit liabilities. Another important part of RTC's activities included ensuring that as many thrift violators as possible were brought to justice and that funds were recovered on behalf of taxpayers. RTC investigated, initiated civil litigation, and made criminal referrals in cases involving former officers, directors, professionals, and others who played a role in the demise of failed institutions. Approximately $2.4 billion was recovered from professional liability claims, and $26 million was collected in criminal restitution. As of December 31, 1995, RTC estimated that the total cost for resolving the 747 failed institutions was $87.9 billion. These costs represent the difference between recoveries from receivership assets and the amounts advanced to pay depositors and other creditors of failed institutions plus the expenses associated with resolving institutions. As shown in table 1, $81.3 billion, or 92 percent, of RTC's total estimated costs have already been realized through December 31, 1995, and therefore, are known. The estimated $6.6 billion remaining at December 31, 1995, represents expected future losses on remaining receivership and corporate assets. The ultimate recoveries on those assets are subject to uncertainties. Losses of $72.2 billion were realized while institutions were in receivership and after termination. Receivership losses were realized when amounts realized from asset sales were not sufficient to repay the amounts advanced by RTC. For those institutions that were terminated, RTC realized further losses if it later sold assets for less than the price it paid when it purchased the assets from the receiverships at termination. RTC borrowed working capital funds from the Federal Financing Bank (FFB) to provide funding for insured deposits and to replace high-cost borrowing of the failed institutions. In general, these funds were expected to be repaid with the proceeds from receivership asset sales, with any shortfall being covered by loss funding. Through December 31, 1995, RTC incurred $10.2 billion in interest expense on amounts borrowed from the FFB for working capital. RTC's administrative expenses represent overhead expenses not otherwise charged or billed back to receiverships. The portion of expenses billed back to receiverships is not included in RTC's administrative expense total, but is included in the loss from receiverships. In addition, receiverships pay many other expenses directly which are also included in the losses from receiverships. The estimated $6.6 billion of future costs include expected losses from receiverships and terminations as well as estimated future administrative expenses. In total, the Congress provided funding to cover $105 billion of losses and expenses associated with RTC's resolution of failed institutions. As shown in table 2, after reducing the $105 billion available for RTC's estimated losses of $87.9 billion, an estimated $17.1 billion in unused loss funds will remain. The final amount of unused loss funds will not be known with certainty until all remaining assets and liabilities are liquidated. Loss funds not used for RTC resolution activity are available until December 31, 1997, for losses incurred by the SAIF, if the conditions set forth in the Resolution Trust Corporation Completion Act are met. Also, according to the act, unused loss funds will be returned to the general fund of the Treasury. RTC used thousands of private contractors to manage and dispose of assets from failed thrifts, including activities such as collecting income and paying expenses. The estimated recoveries from receiverships included in RTC's financial statements include the receipts collected and disbursements made by contractors that perform services for receiverships. As we previously reported, weak operating controls over contract issuance and contractor oversight may have affected the amounts RTC ultimately recovered from its receiverships. While we assess, as part of our financial statement audit, internal accounting controls over receivership receipts and disbursements, RTC's operating controls over contract issuance and contractor oversight are not part of the scope of our audit. These operating controls were reviewed by RTC's Inspector General and Office of Contract Oversight and Surveillance, as well as by GAO in other reviews. RTC took various actions to improve the process of contract issuance and contractor oversight, and had placed increased emphasis on the process of closing out contracts to ensure that contractors have fulfilled all contractual responsibilities. However, results of audits conducted by RTC's Inspector General and Office of Contract Oversight and Surveillance demonstrated that despite RTC's actions to correct contracting problems, the effects of early neglect of contracting operations remained. These audits identified internal control problems with RTC's auction contracts and with RTC's general oversight of contractors. These audits also identified significant performance problems with contracts that were issued before many contracting reforms and improvements were implemented by RTC. During 1995, RTC closed many contracts, pursued contract audit resolution, identified contracts necessary to accomplish the remaining workload after RTC's termination, and processed contract modifications to transfer them to FDIC. However, estimated future recoveries from RTC receiverships remain vulnerable to the risks associated with early weaknesses in contractor oversight and performance. As a result of these operating weaknesses, RTC could not be sure that it has recovered all it should have recovered from its receiverships. RTC's costs for its responsibilities in resolving the savings and loan crisis represent only a portion of the total costs of the savings and loan crisis. The cost associated with FSLIC assistance and resolutions represents another sizable direct cost. In addition, the total cost includes indirect costs related to tax benefits granted in FSLIC assistance agreements. Of the $160.1 billion in total direct and indirect costs, approximately $132.1 billion, or 83 percent was provided from taxpayer funding sources. The remaining $28.0 billion, or 17 percent was provided from industry assessments and other private sources. (See Figure 1.) As shown in table 3, the direct costs associated with resolving the savings and loans crisis include the cost of RTC resolutions, FSLIC activity, and supervisory goodwill claims. All of the funding for the estimated $152.6 billion in estimated costs related to FSLIC and RTC has been provided as of December 31, 1995. However, the cost of the claims is currently uncertain. RTC resolved 747 failed institutions through June 30, 1995, when its authority to close failed thrifts expired. As of December 31, 1995, the total estimated losses associated with RTC's resolved institutions is $87.9 billion. Taxpayer funding for RTC's direct costs is estimated to be $81.9 billion, which is made up of $56.6 billion in appropriations and $25.3 billion related to the government's responsibility attributable to the REFCORP transaction. The private sources of funding for RTC activity totaled $6.0 billion, consisting of $1.2 billion contributed to RTC from the Federal Home Loan Banks, and $4.8 billion from SAIF and the Federal Home Loan Banks to support the REFCORP transaction. As of December 31, 1995, the total estimated costs associated with FSLIC activity was $64.7 billion. The estimated cost includes expenses and liabilities arising from FSLIC assistance provided to acquirers of failed or failing savings and loan institutions and FSLIC resolution activity since January 1, 1986. Taxpayer funding for FSLIC's costs consists of appropriations used by the FSLIC Resolution Fund and totaled $42.7 billion. The private sources of funding for the FSLIC costs include $13.8 billion from FSLIC capital and industry assessments and $8.2 billion provided by FICO. An additional cost of the savings and loan crisis results from the federal government's legal exposure related to supervisory goodwill and other forbearances from regulatory capital requirements granted to the acquirers of troubled savings and loan institutions in the 1980s. As of December 31, 1995, there were approximately 120 pending lawsuits which stem from legislation that resulted in the elimination of supervisory goodwill and other forbearances from regulatory capital. These lawsuits assert various legal claims including breach of contract or an uncompensated taking of property resulting from the FIRREA provisions regarding minimum capital requirements for thrifts and limitations as to the use of supervisory goodwill to meet minimum capital requirements. One case has resulted in a final judgment of $6 million against FDIC, which was paid by FRF. On July 1, 1996, the United States Supreme Court concluded that the government is liable for damages in three other cases in which the changes in regulatory treament required by FIRREA led the government to not honor its contractual obligations. However, because the lower courts had not determined the appropriate measure or amount of damages, the Supreme Court returned the cases to the Court of Federal Claims for further proceedings. Until the amounts of damages are determined by the court, the amount of additional cost from these three cases is uncertain. Further, with respect to the other pending cases, the outcome of each case and the amount of any possible damages will depend on the facts and circumstances, including the wording of agreements between thrift regulators and acquirers of troubled savings and loan institutions. Estimates of possible damages suggest that the additional costs associated with these claims may be in the billions. The Congressional Budget Office's December 1995 update of its baseline budget projections increased its projection of future federal outlays for fiscal years 1997 through 2002 by $9 billion for possible payments of such claims. As shown in table 3, the estimated cost of special tax benefits related to FSLIC assistance agreements represents an indirect cost of the savings and loan crisis. The estimated total cost for these tax benefits is $7.5 billion, which will be funded using taxpayer sources. Acquiring institutions received various tax benefits associated with FSLIC assistance agreements. For instance, for tax purposes, assistance paid to an acquiring institution was considered nontaxable. In addition, in some cases, acquiring institutions could carry over certain losses and tax attributes of the acquired troubled institutions to reduce their own tax liability. The effect of these special tax benefits was to reduce the amount of FSLIC assistance payments required by an acquiring institution for a given transaction because of the value of tax benefits associated with the transaction. Thus, total assistance received by an acquiring institution consisted of both FSLIC payments and the value of these tax benefits. Because these tax benefits represented a reduction in general Treasury receipts rather than direct costs to FSLIC, we are presenting tax benefits as indirect costs associated with FSLIC's assistance transactions. Of the $7.5 billion in estimated tax benefits, $3.1 billion has been realized through December 31, 1995. The remaining $4.4 billion represents an estimate of the future tax benefits that could be realized by acquiring institutions in the future. However, the amount of future tax benefits depends greatly upon the future actions and profitability of the acquirers. For example, reduced or enhanced earnings, institutional acquisitions, and changes in corporate control would all affect acquirers' taxable income or the amount of tax benefits allowed to offset such taxable income in the future. The current estimate of future tax benefits is based on assumptions which are currently deemed most likely to occur in the future. However, if conditions change, the amount of future estimated tax benefits realized could be substantially higher or lower than the estimated $4.4 billion. Although most of the direct and indirect costs of the savings and loan crisis had been funded or provided for through December 31, 1995, significant fiscal implications remain as a result of the crisis. Substantial funds were borrowed through bonds specifically designed to provide funding for a portion of the direct costs. Both taxpayers and the industry are paying financing costs on those bonds. In addition, a significant portion of direct costs were paid from appropriations at a time when the federal government was operating with a sizable budget deficit. Therefore, it is arguable that additional borrowing was incurred. In view of these circumstances, we are presenting information on the known and estimated interest expense associated with financing the crisis because the future stream of payments associated with interest will have continuing fiscal implications for taxpayers and the savings and loan industry. An additional fiscal implication is that SAIF is currently undercapitalized and the savings and loan industry continues to pay high insurance premiums to build the fund. In 1987, the Congress established FICO, which had the sole purpose of borrowing funds to provide financing to FSLIC. FICO provided funding for FSLIC-related costs by issuing $8.2 billion of noncallable, 30-year bonds to the public. In 1989, the Congress established REFCORP to borrow funds and provide funding to RTC. REFCORP provided funding to the RTC for resolution losses by issuing $30.0 billion of noncallable, 30- and 40-year bonds to the public. The annual interest expense on the $38.2 billion of bonds issued by FICO and REFCORP has and will continue to have a significant impact on taxpayers and the savings and loan industry. The annual FICO bond interest is funded from the industry's insurance premiums and represents an increasing burden on the savings and loan industry. In addition, the government's portion of annual interest expense on the REFCORP bonds will continue to require the use of increasingly scarce budgetary resources. Annual interest on the FICO bonds is $793 million and is currently being paid from industry assessments and interest earnings on FICO's cash balances. The annual interest obligation on the FICO bonds will continue through the maturity of the bonds in the years 2017 through 2019. The total nominal amount of interest expense over the life of the FICO bonds will be $23.8 billion. Annual interest expense on the REFCORP bonds is $2.6 billion. The Federal Home Loan Banks contribute $300 million annually to the payment of REFCORP interest expense, and the remaining $2.3 billion of annual interest expense is paid through appropriations. Annual interest expense will continue through the maturity of the REFCORP bonds in the years 2019, 2020, 2021, and 2030. The total nominal amount of interest expense over the life of the REFCORP bonds will be $88 billion. The largest source of funding to pay the direct costs of the savings and loan crisis was provided by taxpayers as a result of legislation enacted to specifically deal with the crisis. This legislation was enacted during a period in which the federal government was financing--via deficit spending--a sizable portion of its regular, ongoing program activities and operations. Under these circumstances, it is arguable that substantial, incremental Treasury borrowing occurred in order to finance the taxpayer portion of the crisis. To arrive at an amount for estimated future interest associated with appropriations, we made various simplifying assumptions. For purposes of estimating Treasury interest expense associated with resolving the savings and loan crisis, we assumed that the entire amount of appropriations used to pay direct costs was borrowed. Various other simplifying assumptions were made regarding interest rates and the financing period. We assumed that the $99.3 billion in appropriations for the FSLIC Resolution Fund and the RTC would be financed for 30 years at 7 percent interest,with no future refinancing. Under these assumptions, approximately $209 billion in estimated interest payments would be needed over 30 years to cover the interest expense related to appropriations used to cover the direct costs of the crisis. Table 4 presents the known and estimated interest expense components associated with the financing mechanisms used to provide funds for the direct costs of the savings and loan crisis. Significant resources will be needed in the future to pay the known annual interest expense on the FICO and REFCORP bonds as well as the estimated Treasury interest expense related to the crisis. As shown in table 5, $20.4 billion, or 18 percent of the total nominal interest expense on FICO and REFCORP bonds has been paid through December 31, 1995. The remaining $91.4 billion, or 82 percent, will be funded in the future. Future interest expense of approximately $18 billion remains to be paid to cover the FICO bond interest. Currently, insurance premiums paid by certain SAIF-insured institutions are used to pay annual FICO bond interest expense. In 1995, the FICO interest expense represented about 69 percent of insurance premiums earned on SAIF's FICO-assessable base. In recent years, the FICO-assessable base has been shrinking, thereby increasing the burden of the FICO interest expense relative to the size of the assessment base, and calling into question the future ability of the FICO-assessable base to cover the annual FICO interest expense. Future interest expense of approximately $73.4 billion remains to be paid on the REFCORP bonds. The Federal Home Loan Banks will continue to be responsible for paying $300 million each year toward the cost of REFCORP interest expense until the bonds mature. The remaining portion of the REFCORP bond interest expense will be paid with Treasury funds until the bonds mature in the years 2019, 2020, 2021, and 2030. For purposes of analyzing the timing of estimated Treasury interest expense on funds provided to pay the direct costs, we estimated that approximately $176 billion of the $209 billion in estimated Treasury interest expense, shown in table 5, related to future periods. Under these assumptions, future estimated Treasury interest would represent a significant claim on future federal budgetary resources. FIRREA created SAIF to insure deposits previously insured by the FSLIC, and set a designated reserve requirement of 1.25 percent of insured deposits. We consider the need to capitalize SAIF a remaining fiscal implication of the crisis because insurance premiums that could have been used to capitalize SAIF were used to pay a portion of the direct costs of the crisis,as well as annual interest expense on the FICO bonds. As a result, SAIF's capitalization has been delayed, creating ongoing implications in terms of high deposit insurance premiums. In order to be fully capitalized, SAIF would have needed $8.9 billion in reserves based on the level of insured deposits at December 31, 1995. However, at that date, SAIF had reserves of only $3.4 billion, $5.5 billion below the designated reserve amount of $8.9 billion. preparing annual financial statements in conformity with generally establishing, maintaining, and assessing the internal control structure to provide reasonable assurance that the broad control objectives of FMFIA are met; and complying with applicable laws and regulations. We are responsible for obtaining reasonable assurance about whether (1) the financial statements are free of material misstatement and presented fairly, in all material respects, in conformity with generally accepted accounting principles and (2) RTC management's assertion about the effectiveness of internal controls is fairly stated in all material respects and is based upon the criteria established under FMFIA. We are also responsible for testing compliance with selected provisions of laws and regulations and for performing limited procedures with respect to certain other information appearing in the financial statements. In order to fulfill these responsibilities, we examined, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessed the accounting principles used and significant estimates made by evaluated the overall presentation of the financial statements; obtained an understanding of the internal control structure related to safeguarding assets, compliance with laws and regulations, including the execution of transactions in accordance with management authority and financial reporting; tested relevant internal controls over safeguarding, compliance, and financial reporting and evaluated management's assertion about the effectiveness of internal controls; and tested compliance with selected provisions of the following laws and regulations: section 21A of the Federal Home Loan Bank Act (12 U.S.C. 1441a) and Chief Financial Officers Act of 1990, sections 305 and 306 (Public Law 101-576). We did not evaluate all internal controls relevant to operating objectives as broadly defined by FMFIA, such as those controls relevant to preparing statistical reports and ensuring efficient operations. We limited our internal control testing to those controls necessary to achieve the objectives outlined in our opinion on RTC management's assertion about the effectiveness of internal controls. Because of inherent limitations in any internal control structure, losses, noncompliance, or misstatements may nevertheless occur and not be detected. We also caution that projecting our evaluation to future periods is subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with controls may deteriorate. With the termination of RTC on December 31, 1995, an important phase of the savings and loan crisis ended. To provide an historical perspective on RTC and its role in resolving the crisis, we obtained and reviewed background information and data from RTC and FDIC. In addition, we obtained and analyzed audited financial information from the following entities which had varying roles in resolving the savings and loan crisis: FSLIC, FICO, RTC, REFCORP, FSLIC Resolution Fund, and SAIF. We conducted our audit from July 7, 1995, through June 7, 1996, in accordance with generally accepted government auditing standards. FDIC provided written comments on a draft of this report because of its responsibility for RTC's remaining assets and liabilities and its role in preparing RTC's final financial statements. In FDIC's comments, provided in appendix III, the Corporation's Chief Financial Officer acknowledges the weaknesses in general controls over RTC's computerized information systems and discusses the status of RTC and FDIC actions to correct them. We plan to evaluate the adequacy and effectiveness of those corrective actions as part of our audit of FDIC's 1996 financial statements. The Chief Financial Officer's comments also discuss FDIC's involvement in RTC's transition and FDIC's plans in assuming responsibility for closing out RTC's active and completed contracts. Accounting and Information Management Division, Washington, D.C. Resolution Trust Corporation: Implementation of the Management Reforms in the RTC Completion Act (GAO/GGD-95-67, March 9, 1995) Resolution Trust Corporation: Evaluations Needed to Identify the Most Effective Land Sales Methods (GAO/GGD-95-43, April 13, 1995) 1993 Thrift Resolutions: RTC's Resolution Process Generally Adequate to Determine Least Costly Resolutions (GAO/GGD-95-119, May 15, 1996) Resolution Trust Corporation: Management Improvements Reduce Risk But Transition Challenges Remain (GAO/T-GGD-95-163, May 16, 1995) Resolution Trust Corporation: Management Improvements Reduce Risk But Transition Challenges Remain (GAO/T-GGD-95-188, June 20, 1995) Inspectors General: Mandated Studies to Review Costly Bank and Thrift Failures (GAO/GGD-95-126, July 31, 1995) Resolution Trust Corporation: Performing Assets Sold to Acquirers of Minority Thrifts (GAO/GGD-96-44, December 22, 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. 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 legislative requirement, GAO audited the Resolution Trust Corporation's (RTC) financial statements for the years ended December 31, 1995 and 1994. GAO also reviewed: (1) RTC internal control weaknesses; (2) RTC mission and its completion; (3) RTC costs and funding; and (4) the cost of resolving the savings and loan crisis. GAO found that: (1) RTC financial statements were reliable in all material aspects; (2) although RTC internal controls need improvement, they were effective in safeguarding assets, ensured that transactions were in accordance with management authority and material laws and regulations, and ensured that there were no material misstatements; and (3) there was no material noncompliance with applicable laws and regulations. GAO also found that: (1) RTC essentially accomplished its mission of closing insolvent institutions, liquidating institution assets, insuring depositor accounts, and bringing many thrift violators to justice; (2) the estimated cost of RTC activities totalled $87.9 billion; (3) RTC contractor control weaknesses and performance problems could adversely affect receivership recoveries; (4) all of the $160.1 billion in estimated direct and indirect costs of RTC and Federal Savings and Loan Insurance Corporation activities have been provided for as of December 31, 1995; (5) the cost of present and future litigation resulting from the savings and loan crisis is unknown; (6) the annual interest expense on the $38.2 billion in Financing Corporation and Resolution Funding Corporation bonds will continue to significantly impact taxpayers and the savings and loan industry; and (7) because the Savings Association Insurance Fund has not been fully capitalized, thus deposit insurance premiums have remained high.
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DOE has a large complex of sites around the country dedicated to supporting its missions: sites that were used to produce or process materials and components for nuclear weapons and laboratories that conduct research on nuclear weapons, defense issues, basic science, and other topics. These sites and laboratories are often located on government-owned property and facilities, but are usually operated by organizations under contract to DOE, including universities or university groups, non-profit organizations, or other commercial entities. DOE contracting activities are governed by federal laws and regulations. Although federal laws generally require federal agencies to use competition in selecting a contractor, until the mid-1990s, DOE contracts for the management and operation of its sites generally fit within an exception that allowed for the use of noncompetitive procedures. Those contracts were subject to regulation that established noncompetitive extensions of contracts with incumbent contractors as the norm and permitted competition only when it appeared likely that the competition would result in improved cost or contractor performance and would not be contrary to the government's best interests. In the mid-1990s, DOE began a series of contracting reforms to improve its contractors' performance. A key factor of that initiative has been the increasing use of competition as a way to select management and operating contractors for DOE sites. Although DOE initially focused the increased use of competition on its contracts with for-profit organizations, the laboratories operated by universities and other nonprofit organizations have not been completely insulated from these changes. Contract administration in DOE is carried out by the program offices, with guidance and direction from DOE's Office of Procurement and Assistance Management. The management and operating contracts at DOE's FFRDC laboratories are administered primarily by the National Nuclear Security Administration, a semi-autonomous agency within DOE; or DOE's Offices of Science, Environmental Management, or Nuclear Energy, Science, and Technology. DOE has had three main reasons for competing its FFRDC contracts instead of extending the contracts noncompetitively: when the contractor operating the laboratory is a for-profit entity, when mission changes warrant a review of the capabilities of other potential contractors, or when the incumbent contractor's performance is unsatisfactory. Without one of these conditions, DOE has generally extended these contracts without competition. DOE has considerable flexibility in deciding whether to compete a management and operating contract for one of its FFRDC laboratories. Although federal procurement law specifies a clear preference for competition in awarding government contracts, the Competition in Contracting Act of 1984 provided for certain conditions under which full and open competition is not required. One of these noncompetitive conditions occurs when awarding the contract to a particular source is necessary to establish or maintain an essential engineering, research, or development capability to be provided by an educational or other nonprofit institution or a FFRDC. The Federal Acquisition Regulation, which implements federal law, defines government-wide policy and requirements for FFRDCs, including the establishment, use, review, and termination of the FFRDC relationship. Under this regulation (1) there must be a written agreement of sponsorship between the government and the FFRDC; (2) the sponsoring governmental agency must justify its use of the FFRDC; (3) before extending the agreement or contract with the FFRDC, the government agency must conduct a comprehensive review of the use and need for the FFRDC; and (4) when the need for the FFRDC no longer exists, the agency may transfer sponsorship to another government agency or phase out the FFRDC. DOE's 1996 acquisition guidance describes the procedures DOE program offices must follow to support any recommendation for a non-competitive extension of any major site contract, including a FFRDC contract. This guidance indicates a clear preference for competition and requires DOE program offices to make a convincing case to the Secretary before a noncompetitive contract extension is allowed. This preference for competition is an outcome of DOE's contract reform initiative, which concluded that DOE needed to expand the use of competition in awarding or renewing contracts. Among other things, the 1996 guidance specifies that, before a noncompetitive contract extension can occur, DOE must provide a certification that full and open competition is not in the best interest of a detailed description of the incumbent contractor's past performance, an outline of the principal issues and/or significant changes to be negotiated in the contract extension, and in the case of FFRDCs, a showing of the continued need for the research and development center in accordance with criteria established in the Federal Acquisition Regulation. In November 2000, DOE's Office of Procurement and Assistance Management issued additional guidance on how to evaluate an incumbent contractor's past performance when deciding whether to extend or compete an existing contract. The guidance states that DOE contracting officers must review an incumbent contractor's overall performance including technical, administrative, and cost factors, and it outlines the information required to support the performance review and the expected composition of the evaluation team. When reporting the results of a performance evaluation, the team should address all significant areas of performance and highlight the incumbent contractor's strengths and weaknesses. The evaluation team's report serves as the basis for determining whether extending a contract is in the best interests of the government and is subject to review and concurrence by the responsible assistant secretary and DOE's Procurement Executive. In September 2002, we reported that DOE had taken several steps to expand competition for its site management and operating FFRDC contracts. First, DOE reassessed which sites it should continue to designate as federally funded research and development centers. As a result of the reassessment, DOE removed 6 of the 22 sites from the FFRDC designation. DOE subsequently competed the contracts for two of these-- the Knolls and Bettis Atomic Power Laboratories in New York and Pennsylvania. DOE restructured the other four contracts and, because of the more limited scope of activities, no longer regards them as major site contracts. The six site contracts that DOE has dropped from FFRDC status since 1992 are listed in table 1. For the 16 remaining FFRDC contracts that DOE sponsors, DOE has competed 6 of them and is planning to compete two additional contracts in 2004 and 2005. The 16 current FFRDC sites and the competitive status of the site contract are shown in table 2. DOE's decision to compete the six FFRDC sites shown in table 2 is consistent with the department's overall policy on determining when competition is appropriate. For example, DOE competed the contract for the Brookhaven National Laboratory in 1997, after terminating the previous contract for unsatisfactory performance by the incumbent contractor. DOE competed the contract for the National Renewable Energy Laboratory in 1998 to incorporate additional private sector expertise into the management team for the site. This competition resulted from an expanded mission at the site to develop innovative renewable energy and energy efficient technologies and to incorporate these technologies into cost effective new products. For the remaining four FFRDC contracts that DOE has competed, the operator of the laboratory was a for-profit entity. When DOE has decided not to compete its FFRDC contracts but to extend them noncompetitively, its decisions have not been without controversy. For example, in 2001, DOE extended the management and operating contracts with the University of California for the Los Alamos and Lawrence Livermore National Laboratories. The University of California has operated these sites for 50 years or more and has been the sites' only contractor. In recent years, we and others have documented significant problems with laboratory operations and management at these two laboratories--particularly in the areas of safeguards, security, and project management. Congressional committees and others have called for DOE to compete these contracts. Until recently, however, DOE did not compete them. Instead, DOE chose to address the performance problems using contract mechanisms, such as specific performance measures and interim performance assessments. In our September 2002 report, we commented that if the University of California did not make significant improvements in its performance, DOE may need to reconsider its decision not to compete the contracts. In April 2003, the Secretary of Energy decided to open the Los Alamos National Laboratory contract to competition when the current contract expires in September 2005. The Secretary made this decision based on "systemic management failures" that came to light in 2002. The management failures included inadequate controls over employees' use of government credit cards, inadequate property controls and apparent theft of government property, and the firing of investigators attempting to identify the extent of management problems at the laboratory. DOE has also decided to restructure the FFRDC contracts supporting work at the Idaho National Laboratory. Currently the laboratory has two FFRDC contracts--(1) a site management contract that includes activities ranging from waste cleanup to facility operations activities and (2) a contract to operate Argonne National Laboratory, which includes the Argonne West facility at the Idaho site. DOE plans to restructure the two contracts so that one focuses on the nuclear energy research mission and the other focuses on the cleanup mission at the site. DOE also plans to include the activities at Argonne West in the contract competition for the site's research mission and to remove the Argonne West scope of work from DOE's existing contract with the University of Chicago to operate Argonne National Laboratory. DOE believes this contract restructuring will help revitalize the nuclear energy research mission at the Idaho Site and accelerate the environmental cleanup. DOE is continuing to examine the nature of its relationship with FFRDC contractors and the implications of that relationship for its contracting approach. DOE established FFRDCs in part to gain the benefits of having a long-term association with the research community beyond that available with a normal contractual relationship. However, more recent events are causing DOE to rethink its approach. As discussed above, DOE has been criticized for not competing laboratory contracts where the contractors are performing poorly. Furthermore, annual provisions in the Energy and Water Development Appropriations Acts since fiscal year 1998 have required DOE to compete the award and extension of management and operating contracts, including FFRDC contracts, unless the Secretary waives the requirement and notifies the Subcommittees on Energy and Water of the House Committee on Appropriations 60 days before contract award. Given these concerns, in 2003 the Secretary of Energy commissioned an independent panel to determine what criteria DOE should consider when deciding whether to extend or compete a laboratory management and operating contract. The panel is expected to help DOE determine, among other things, the conditions under which competition for laboratory contracts is appropriate, the appropriate criteria for deciding to compete or extend laboratory contracts, the benefits and disadvantages derived from competing laboratory contracts, and whether different standards and decision criteria should apply depending on whether the contractor is non- profit, an educational institution, an academic consortium, or a commercial entity. Competing contracts is one of several mechanisms DOE can use to address contractor performance problems or strengthen contract management. However, competing a contract does not ensure that contractor performance will improve. Other steps DOE has taken as part of its contract reform initiative to address contractor performance issues include changing the type of contract, such as from a cost-reimbursement to a fixed-price contract, or establishing or strengthening performance- based incentives in the contract. For example, in September 2002, we reported that DOE now requires performance-based contracts at all of its major sites. DOE has also increased over time the proportion of contractors' fees tied to achieving those performance objectives. However, DOE has struggled to develop effective performance measures and continues to modify and test various performance measures that more directly link performance incentives to a site's strategic objectives. Even these changes to DOE's contracts do not by themselves ensure that contractor performance will improve. We have reported that DOE must also (1) effectively oversee its contractors' activities in carrying out projects and (2) use appropriate outcome measures to assess overall results and apply lessons learned to continually improve its contracting practices. Effectively overseeing contractor activities involves, among other things, ensuring that appropriate and effective project management principles and practices are being used. Since June 1999, DOE has been working to implement recommendations by the National Research Council on how to improve project management at DOE. In 2003, the National Research Council reported that DOE has made progress in improving its management of projects but that effective management of projects was not fully in place. Regarding the use of outcome measures to assess overall results, in September 2002, we reported that DOE did not have outcome measures or data that could be used to assess the overall results of its contract reform initiatives. We recommended that DOE develop an approach to its reform initiatives, including its contracting and project management initiatives, that is more consistent with the best practices of high-performing organizations. DOE is still working to put a best-practices approach in place. As we reported in 2001, improving an organization's performance can be difficult, especially in an organization like DOE, which has three main interrelated impediments to improvement--diverse missions, a confusing organizational structure, and a weak culture of accountability. However, DOE expects to spend hundreds of billions of dollars in future years on missions important to the well-being of the American people, such as ensuring the safety and reliability of our nuclear weapon stockpile. Therefore, the department has compelling reasons to ensure that it has in place an effective set of contracting and management practices and controls. Thank you, Madam Chairman and Members of the Subcommittee. This concludes my testimony. I would be pleased to respond to any questions that you may have. For further information on this testimony, please contact Ms. Robin Nazzaro at (202) 512-3841. Individuals making key contributions to this testimony included Carole Blackwell, Bob Crystal, Doreen Feldman, Molly Laster, Carol Shulman, Stan Stenersen, and Bill Swick. 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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DOE is the largest civilian-contracting agency in the federal government, and relies primarily on contractors to operate its sites and carry out its diverse missions. For fiscal year 2003, DOE will spend about 90 percent of its total annual budget, or $19.8 billion, on contracts, including $9.4 billion to operate 16 of its research laboratories (called federally funded research and development centers). Since 1990, GAO has identified DOE's contract management as high-risk for fraud, waste, abuse, and mismanagement. In 1994, DOE began reforming its contracting practices to, among other things, improve contractor performance and accountability. As part of that effort, DOE has at times used competition in awarding contracts to manage and operate its research laboratories. In September 2002, GAO reported on the status of contract reform efforts in DOE. (Contract Reform: DOE Has Made Progress, but Actions Needed to Ensure Initiatives Have Improved Results) (Sep. 2002, GAO-02-798) This testimony discusses some of the findings in that report. GAO was asked to testify on DOE's rationale for deciding whether to compete a laboratory research contract, the extent to which DOE has competed these contracts, and the role of competition and other mechanisms in improving contractor performance. DOE has competed its research laboratory contracts in three main situations--when the contractor operating the laboratory is a for-profit entity, when mission changes warrant a review of the capabilities of other potential contractors, or when the incumbent contractor's performance is unsatisfactory. DOE guidance requires that to extend a contract noncompetitively, the department must present a convincing case for doing so to the Secretary of Energy. Among other things, DOE must certify that competing the contract is not in the best interests of the government and must describe the incumbent contractor's past successful performance. Of the 16 research laboratory contracts currently in place, DOE has competed 6. The remaining 10 contracts have not been competed since the contractors began operating the sites--in some cases, since the 1940s. DOE recently decided to compete 2 of the 10 contracts that had never before been competed--contracts to operate the Los Alamos National Laboratory in New Mexico and the Argonne West Laboratory, located at the Idaho National Laboratory. DOE decided to compete the Los Alamos contract because of concerns about the contractor's performance, and to compete the Argonne West contract as part of an overall effort to separate the Idaho National Laboratory's nuclear energy research mission from the environmental cleanup mission at the Idaho site. Competing contracts is one of several mechanisms DOE can use to address contractor performance problems or strengthen contract management. However, just competing a contract does not ensure that contractor performance will improve. Other aspects of DOE's contract reform initiative intended to improve contractor performance included greater use of fixed-price contracts instead of cost-reimbursement contracts and establishing or strengthening performance-based incentives in existing contracts. In addition, GAO has reported that DOE must (1) effectively oversee its contractors' activities in carrying out projects and (2) use appropriate outcome measures to assess overall results and apply lessons learned to continually improve its contracting practices. GAO's recent evaluation of DOE's contract reform efforts indicates that DOE is still working to put these management practices and outcome measures in place.
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the labor force--23 million workers--is employed by companies with federal contracts and subcontracts, according to fiscal year 1996 estimates of the Department of Labor's Office of Federal Contract Compliance Programs (OFCCP). Federal law and an executive order place greater responsibilities on federal contractors, compared with other employers, in some areas of work place activity. For example, federal contractors must comply with Executive Order 11246, which requires a contractor to develop an affirmative action program detailing the steps that the contractor will take and has already taken to ensure equal employment opportunity for all workers, regardless of race, color, religion, sex, or national origin. In addition, the Service Contract Act and the Davis-Bacon Act require the payment of the area's prevailing wages and benefits on federal contracts in the service and construction industries, respectively. Furthermore, Labor may debar contractors in the construction industry under the Contract Work Hours and Safety Standards Act for "repeated willful or grossly negligent" violations of safety and health standards issued under the OSH Act. Under federal procurement regulations, agencies may deny an award of a contract, or debar or suspend a contractor, for a variety of reasons, including safety and health compliance problems. Before awarding a contract, an agency must make a positive finding that the bidder is "responsible," as detailed in federal procurement regulations. Also, federal agencies can debar or suspend companies for any "cause of so serious or compelling a nature that it affects the present responsibility of a government contractor or subcontractor." In determining whether a federal contractor is "responsible," agency contracting officials can consider compliance with applicable laws and regulations, which could include the OSH Act or the NLRA. adverse contracting action. At its monthly meetings, the committee also helps interpret regulations on debarment or suspension issued by OMB and determines which agency will take lead responsibility for any actions taken against a federal contractor. Most firms--regardless of whether they are federal contractors--must comply with safety and health standards issued under the OSH Act of 1970, which was enacted "to assure safe and healthful working conditions for working men and women." The Secretary of Labor established OSHA to carry out a number of responsibilities, including developing and enforcing safety and health standards; educating workers and employers about work place hazards; and establishing responsibilities and rights for both employers and employees for the achievement of better safety and health conditions. The NLRA provides the basic framework governing private sector labor-management relations. This act, passed in 1935, created an independent agency, NLRB, to administer and enforce the act. Among other duties, NLRB is responsible for preventing and remedying violations of the act--unfair labor practices (ULP) committed by employers or unions. NLRB's functions are divided between its general counsel and a five-member Board. The Office of the General Counsel investigates and prosecutes ULP charges, while the Board reviews all cases decided by administrative law judges in NLRB's 33 regions. Management Information System (IMIS), which contains detailed information on all OSHA inspections conducted by federal OSHA or the state-operated programs. It includes detailed data on penalty amounts, the severity of the violation, the standards violated, whether fatalities or injuries occurred, and other information. In using OSHA's IMIS database, which includes many thousands of inspections annually, we focused only on those inspections resulting in significant penalties--proposed penalties of at least $15,000--regardless of the amount of the actual penalty recorded when the inspection was closed. Using this definition, inspections involving significant penalties represented only 3 percent of the 72,950 inspections closed in fiscal year 1994. We matched the NLRB case data and OSHA's IMIS inspection data with the database of federal contractors maintained by GSA, the Federal Procurement Data System (FPDS). FPDS tracks firms awarded contracts of $25,000 or more in federal funding for products and services. Although it is difficult to estimate the number of federal contractors, GSA reports there may be as many as 60,000 federal contractors because this is the number of unique corporate identification codes in FPDS. FPDS contains a variety of information, including the contractor's name and location, agency awarding the contract, principal place of contract performance, and the dollar amount of the contract awarded. FPDS does not contain information on contractors' safety and health or labor relations' practices. Because the lack of corporate identification numbers in both the NLRB and OSHA databases precluded our use of an automated matching procedure, we had to manually match these data. We manually compared each firm name from the Executive Secretary and IMIS databases and with the larger FPDS file, identifying those firms that were identical or nearly identical. After this manual match, to ensure that the firms listed in the Executive Secretary or IMIS databases were the same as those listed in the FPDS, we telephoned the firm at the location the OSHA or labor violation occurred. We then verified that the firm number and location identified in the Executive Secretary or IMIS database and the FPDS database referred to the same firm. regard to OSHA's characterization of information on its corporatewide or individual facility settlement agreements negotiated with employers. In response, we recommended to the Secretary of Labor that the quality of the IMIS data be assessed as they relate to settlement agreements, and that steps be taken to correct any detected weaknesses. Since that time, OSHA has taken some action to address these concerns, including its introduction of a special code to identify administrative actions taken under corporatewide settlements in IMIS, the inclusion of an additional field to flag cases that are atypical, and additional information added to the IMIS "report explanation" field about the treatment of penalties in certain cases. It should be noted that our approach probably understated, in a number of ways, the number of federal contractors violating the laws. In some cases, firms had gone out of business or relocated, or the location information in the IMIS or FPDS databases was inaccurate or incomplete, or the employer refused or was unable to confirm or deny key information over the telephone, preventing us from verifying a potential match. In other instances, firms may have split, merged, changed names, or operated subsidiaries, so that different names would have appeared among the three databases, thus resulting in matches escaping our detection. We also focused our analysis on violations committed by primary contractors. We did not determine the extent to which contract dollars were awarded by primary contractors to subcontractors with violations, or the degree to which the contractors we identified were also subcontractors on other awards. Concerning IMIS in particular, many employers we identified as violators in OSHA's database were construction companies. Because construction work sites are temporary, the employer could not always remember whether the work place existed or when the inspection was conducted. Regarding the NLRB data, many firms were involved in cases that were withdrawn or settled and our analysis does not include such cases in assessing violations committed, remedies ordered, and number of workers affected. A total of 80 firms that violated the NLRA received over $23 billion from more than 4,400 federal contracts during fiscal year 1993--about 13 percent of total fiscal year 1993 contract dollars. These contract dollars were concentrated among only a few violators, with six such firms receiving about $21 billion. Firms receiving more than $500 million each in contracts got about 90 percent of these federal contract dollars. About 73 percent of the $23 billion was awarded by the Department of Defense, with NASA and the Department of Energy as the other major sources of these contract moneys. About two-thirds of these dollars went to manufacturing firms. Most of the violators were large firms. Of the 77 violators for which data on workforce size were available, 35 had more than 10,000 employees. Of the 64 violators for which sales data were available, 32 had over $1 billion in sales, and 10 firms had over $10 billion in sales. In 35 of the 88 NLRB-related cases we identified as involving the 80 federal contractors, the Board required firms to reinstate workers or restore workers to their prior positions as the remedy for violations. In 32 of these 35 cases, firms were ordered to reinstate unlawfully fired workers. In 6 of the 35, firms were ordered to restore workers who had been subjected to another kind of unfavorable change in job status. An unfavorable change in job status could mean that the worker, for example, was suspended, demoted, transferred, or not hired in the first place because of activities for or association with a union. Some cases involved both an order to reinstate fired workers and an order to restore workers who were subjected to another kind of unfavorable change in job status. These remedies affected a sizable number of specific individual workers and a far larger number of workers who were part of a particular bargaining unit. The Board ordered firms to reinstate or restore 761 individual workers to their appropriate job positions. In 44 of the 88 cases, the Board ordered the firm to pay back wages to 801 workers and ordered the firm to restore benefits to 462 workers in 28 cases. In most cases, back wages or benefits were owed to individual workers who had been illegally fired or subjected to another kind of unfavorable change in job status. However, in 12 cases, wages or benefits were ordered restored to all workers in the bargaining unit because the firm failed to pay wages or benefits as required under its contract with the union. Some cases involved both a remedy for individual workers owed back wages or benefits as well as the same type of remedy for the entire bargaining unit. union. In 24 cases, firms were ordered to stop threatening employees with the loss of their jobs or the shutdown of the firm. Firms were ordered in 33 cases to stop other kinds of threats, such as interrogating employees and circulating lists of employees associated with the union. To facilitate the bargaining of a contract, the Board ordered firms to provide information to the union in 16 cases. We found 261 federal contractors that were the corporate parents of facilities that had received proposed penalties of $15,000 or more from OSHA for violations of safety and health regulations in fiscal year 1994. These contractors received $38 billion in contract dollars, about 22 percent of the $176 billion in federal contracts, valued at $25,000 or more, awarded that year. About 75 percent of the total dollar value of these contracts was awarded by the Department of Defense, with large amounts of contract dollars also awarded by the Department of Energy and NASA. About 5 percent of these 261 federal contractors (12 firms) each received more than $500 million in federal contracts in fiscal year 1994. In total, this group received over 60 percent of the $38 billion awarded to violators. A majority of the 345 work sites (56 percent) penalized for safety and health violations were engaged in manufacturing. An examination of the violators' standard industrial classification codes showed that many of these work sites manufactured paper, food, or primary and fabricated metals. Although most violators were engaged in manufacturing, a significant percentage of work sites (18 percent) were engaged in construction. Many (68 percent) of the work sites where the violations occurred were relatively small, employing 500 or fewer workers. Just over 15 percent of the work sites employed 25 or fewer workers. Although few work sites employed large numbers of workers, the federal contractors that own these work sites often employed large numbers of workers in multiple facilities across the country. serious physical harm to workers, or willful (69 percent)--situations in which the employer intentionally and knowingly committed a violation. At work sites of 50 federal contractors, a total of 35 fatalities and 85 injuries occurred. Most of the violations (72 percent) were of general industry standards, including failure to protect workers from electrical hazards and injuries resulting from inadequate machine guarding. OSHA compliance officers assessed a total of $24 million in proposed penalties and $10.9 million in actual penalties for all violations in these 345 inspections. In some cases, these federal contractors were assessed proposed penalties that were especially high. In 8 percent of the 345 inspections, the contractor was assessed a proposed penalty of $100,000 or more. In addition, some of these 261 federal contractors were assessed a significant penalty more than once in fiscal year 1994 for violations that occurred at different work sites owned by, or associated with, the same parent company. Finally, a search for prior inspections of the same work sites that had been assessed significant penalties for safety and health violations revealed a number of additional inspections of parent company facilities, including some additional significant penalty inspections. We did not evaluate the general safety and health inspection records of federal contractors. However, some of the contractors who were assessed significant penalties also operated facilities with exemplary health and safety records, while others maintained facilities that participated in other OSHA-sanctioned voluntary compliance programs that suggest a proactive approach to work place safety and health. Management Services Department, which is developing its comprehensive database on federal contractors. In our report on federal contractors who violated OSHA regulations, we concluded that contracting agencies could use information on a contractor's safety and health record during the procedure for the awarding of federal contracts as a vehicle to encourage a contractor to undertake remedial measures to improve work place conditions.However, agency contracting authorities have not done so, at least partially because they did not have the information to determine those federal contractors who are violating safety and health regulations, even when they have been fined significant penalties for willful or repeated violations. Thus, we recommended that the Secretary of Labor direct OSHA to develop and implement policies, in consultation with GSA and the Interagency Committee on Debarment and Suspension, on how safety and health records of federal contractors could be shared to better inform agency awarding and debarring officials in their decisions. We noted, however, that OSHA should work closely with the contracting agencies to help them interpret and use inspection information effectively. We also recommended that OSHA consider the appropriateness of extending these policies and procedures to cover companies receiving other forms of federal assistance such as loans and grants. Finally, we urged OSHA to develop procedures on how it will consider a company's status as a federal contractor in setting its own priorities for inspecting work sites. At this time, OSHA officials have stated that the agency has conducted discussions with members of the Interagency Committee on Suspension and Debarment regarding possible policies and procedures for sharing safety and health records, although no final decisions have yet been made. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or Members of the Subcommittee may have. Project Labor Agreements: The Extent of Their Use and Related Information (GAO/GGD-98-82, May 29, 1998). Beverly Enterprises, Inc. (GAO/HEHS-97-145R, June 3, 1997). OSHA's Inspection Database (GAO/HEHS-97-43R, Dec. 30, 1996). Occupational Safety and Health: Violations of Safety and Health Regulations by Federal Contractors (GAO/HEHS-96-157, Aug. 23, 1996). Worker Protection: Federal Contractors and Violations of Labor Law (GAO/HEHS-96-8, Oct. 24, 1995). National Labor Relations Board: Action Needed to Improve Case-Processing Time at Headquarters (GAO/HRD-91-29, Jan. 7, 1991). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 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 federal contractors' noncompliance with federal labor laws, focusing on: (1) federal contractors' noncompliance with the National Labor Relations Act (NLRA) during fiscal years (FY) 1993 and 1994 and with the Occupational Safety and Health (OSH) Act during FY 1994; and (2) the status of recommendations GAO made to the National Labor Relations Board (NLRB) and to the Occupational Safety and Health Administration (OSHA) in those reports involving the use of information on federal contractors to enhance workplace health and safety and workers' rights to bargain collectively. GAO noted that: (1) federal contracts worth many billions of dollars had been awarded to employers who had been found in violation of NLRA or the safety and health regulations issued under the OSH Act; (2) the 80 firms that had violated the NLRA during FY 1993 and FY 1994 had received $23 billion, or about 13 percent of the total dollar value of federal contracts awarded during FY 1993; (3) there were 261 federal contractors that had work sites at which OSHA had assessed proposed penalties of $15,000 or more for noncompliance with health and safety regulations; (4) these firms received $38 billion in federal contracts awarded during FY 1994; (5) both of these totals probably underestimate the number of violators and contract dollars received during both years; (6) in both cases, most of the contract dollars were awarded to violators that were large firms, and a majority of these firms were in manufacturing industries; (7) about 75 percent of the dollar value of these awards came from the Department of Defense, although many dollars also came from the Department of Energy and the National Aeronautics and Space Administration; (8) although agencies can consider employers' labor-management relations and health and safety records in the awarding of contracts under current procurement regulations, agency officials responsible for awarding contracts and debarring contractors from receiving future contracts have generally not taken actions against contractors with safety and health or labor-relations law violations; (9) this is at least partially because they do not have adequate information to determine those federal contractors in noncompliance with these laws, even when the contractors have been assessed severe penalties or remedies under the respective acts; (10) in its reports, GAO made recommendations to both NLRB and OSHA that could enhance the effectiveness of their enforcement through the use of information on federal contractors; and (11) although NLRB has taken action in implementing GAO's recommendations, OSHA has not yet done so.
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MDA's mission is to develop an integrated and layered Ballistic Missile Defense System to defend the United States, its deployed forces, friends, and allies against ballistic missile attacks. This mission requires complex coordination and the integration of many and varied defensive components--space-based sensors; ground- and sea-based surveillance and tracking radars; advanced ground- and sea-based interceptors; and battle management, command, control, and communications. Prior to MDA's establishment in 2002, the services, along with the support and coordination of the Ballistic Missile Defense Organization, separately managed the development and acquisition of ballistic missile defense weapon systems as major defense acquisition programs. In 2002, the President established ballistic missile defense as a national priority and directed DOD to proceed with plans to develop and put in place an initial capability beginning in 2004. To expedite the delivery of an operationally capable Ballistic Missile Defense System, in 2002 the Secretary of Defense re-chartered the Ballistic Missile Defense Organization as MDA and directed MDA to manage all ballistic missile defense systems then under development and transferred those systems controlled by the military services to the agency. The systems transferred from the services and the new systems whose development MDA initiates are all considered to be "elements" of the Ballistic Missile Defense System. The Secretary also directed MDA to manage the Ballistic Missile Defense System as an evolutionary program, and to develop and field increasingly effective ballistic missile defense capabilities. To do so, he directed that systems developed by MDA would not be subject to DOD's traditional joint requirements determination and acquisition processes until a mature ballistic missile defense capability had been developed and was ready to be handed over to a military service for production and operation. MDA's mission is to develop and field ballistic missile defenses against threats posed by adversaries from all regions, at all ranges, and in all phases of flight. At the direction of the Secretary of Defense and in order to meet a presidential directive, the MDA began fielding in 2004 a limited capability to defend the United States against long-range ballistic missile attacks. This Ground-based Midcourse Defense system, which is intended to protect the U.S. homeland against incoming long-range ballistic missiles launched from Northeast Asia and the Middle East, was first made operational in 2006. MDA has added to this limited capability since it was first fielded by upgrading additional Air Force early warning radars, developing and fielding land- and sea-based radars, and fielding an initial capability for command and control, battle management, and communications. Additionally, to provide sea-based defenses against regional threats for deployed U.S. forces, friends, and allies, MDA has upgraded software and radar systems on 18 Aegis destroyers and cruisers, and delivered interceptors for use on these vessels, to defend against short- and medium-range threats. Early in the next decade, MDA plans to field an additional radar in the Czech Republic and ground-based interceptors in Poland to defend Europe and North America from ballistic missile threats originating in the Middle East. Over the long term, MDA also is developing interceptor payloads that would be capable of defeating more advanced threats--such as the use of multiple warheads or decoys-- and "boost-phase" capabilities to enable DOD to shoot down ballistic missiles shortly after liftoff. To incorporate the views of the combatant commands--which is critical in determining and prioritizing needed capabilities--the President made the U.S. Strategic Command responsible in 2003 for advocating for desirable missile defense characteristics and capabilities on behalf of all combatant commands to MDA. To fulfill this responsibility, U.S. Strategic Command and the MDA created the Warfighter Involvement Process in 2005. A key output of this process is the Prioritized Capabilities List, which is intended to specify how the combatant commands collectively prioritize the full range of capabilities needed to perform ballistic missile defense missions. To operate and support ballistic missile defense elements over the long term, DOD plans to transition the responsibility for supporting ballistic missile defense elements from MDA to the services. Transitioning involves designating lead military service responsibilities for providing personnel, force protection, operations and support, and for developing doctrine, organization, and facilities requirements for its respective element. The transition process may culminate in a transfer--which is the reassignment of the MDA program office responsibilities to the lead service. Oversight of MDA is executed by the Under Secretary of Defense for Acquisition, Technology, and Logistics. Because MDA is not subject to DOD's traditional joint requirements determination and acquisition processes, DOD developed alternative oversight mechanisms. For example, in 2007 the Deputy Secretary of Defense established the Missile Defense Executive Board, which is to provide the Under Secretary of Defense for Acquisition, Technology, and Logistics, or Deputy Secretary of Defense, as necessary, with a recommended ballistic missile defense strategic program plan and feasible funding strategy for approval. In September 2008, the Deputy Secretary of Defense also established a life cycle management process for the Ballistic Missile Defense System. The Deputy Secretary of Defense directed the Board to use the process to oversee the annual preparation of a required capabilities portfolio and develop a program plan to meet the requirements with Research, Development, Test, and Evaluation; procurement; operations and maintenance; and military construction in defensewide accounts. MDA's exemption from traditional DOD processes allowed it the flexibility to quickly develop and field an initial ballistic missile defense capability; however, we have previously reported that DOD's implementation of this approach has resulted in several management challenges that have not been fully addressed. These challenges include immature processes for incorporating combatant command priorities, inadequate baselines to measure progress, and incomplete planning for long-term operations and support. With the start of a new administration and the appointment of a new MDA Director, DOD now has an opportunity to better balance the flexibility inherent in MDA's unique roles and missions with the need for effective management and oversight of ballistic missile defense programs, and to more fully address the challenges that affect its ability to plan and resource ballistic missile defenses. DOD has taken some steps to address combatant command capability needs through the Warfighter Involvement Process, but this process faces key limitations to its effectiveness. For example, based on combatant command inputs received through the Warfighter Involvement Process, MDA initiated new programs in fiscal year 2008 to develop and deploy sea- based defenses against short-range missiles. However, when the Secretary of Defense created MDA in 2002, the agency initially lacked a mechanism for obtaining and considering the combatant commands' priorities as it developed ballistic missile defenses. The lack of such a mechanism made it difficult for MDA and the combatant commands to be sure that MDA was addressing the commands' highest priority capability needs. Although U.S. Strategic Command and MDA established the Warfighter Involvement Process in 2005, we reported in July 2008 that this process is still evolving and had not yet yielded a clear and effective approach for MDA to follow when making investment decisions. Our report identified several shortcomings that inhibited the process' effectiveness. For example: U.S. Strategic Command's and MDA's roles and responsibilities for implementing the process were not fully documented, which left the combatant commands without an agreed-upon method for influencing MDA investments and for holding MDA accountable. U.S. Strategic Command has since issued guidance that documents how the process operates, but this guidance is not binding on MDA and will require updating as the process evolves. As of March 2009 MDA had drafted but not yet issued similar guidance. As a result, the combatant commands continue to lack both transparency into the agency's decision-making process and assurance that MDA will implement the process in a manner that addresses their needs. The process has not yet resulted in effective methodologies for the combatant commands to clearly identify and consistently prioritize their capability needs. For example, in preparing the 2007 Prioritized Capabilities List--intended to give combatant commanders input into development priorities--combatant commands used differing criteria for assessing capabilities, and not all commands clearly distinguished among their top priorities. As a result, the list did not provide MDA with clear information about how to best address the combatant commands' needs. DOD agreed with our recommendation that U.S. Strategic Command improve the methodologies for identifying and prioritizing capabilities, but has not yet completed the 2009 Prioritized Capabilities List. Senior civilian DOD leadership has not been involved in the Warfighter Involvement Process to adjudicate potential differences among the combatant commands' priorities and provide perspective on how to invest resources against priorities as the leadership would under traditional DOD processes. Lacking such senior-level involvement, MDA has not benefited from receiving a broader perspective on which of the commands' needs is the most significant. To address this shortcoming, we recommended that senior civilian leadership review the commands' priorities before they are sent to MDA. DOD partially agreed with our recommendation, but it did not clearly identify the steps it would take to implement the recommendation. A congressionally mandated independent review, released in August 2008, of MDA's roles, missions, and structure also identified the need to improve the Warfighter Involvement Process. Although the independent review found that the Warfighter Involvement Process provided a potential mechanism for the combatant commands to influence Ballistic Missile Defense System developments, the review made several recommendations to make the process more effective. In particular, as our July 2008 report recommended, the independent review recommended that DOD improve the methodologies used to develop and prioritize the combatant commands' capability needs so that the Prioritized Capabilities List provides more adequate guidance to MDA. Since our July 2008 report was issued, U.S. Strategic Command has responded to our recommendation that the combatant commands compare their priorities with MDA's long-term funding plans and provide an assessment--called the Capability Assessment Report--to MDA. U.S. Strategic Command expects the first assessment to be completed by the end of April 2009. The assessment represents the combatant commands' official assessment of MDA's response to the 2007 Prioritized Capabilities List, and is also intended to provide a basis for MDA to make capability trade-offs and programmatic adjustments to ensure acquisition of the warfighters' desired capabilities. U.S. Strategic Command provided MDA with a preliminary overview of the assessment in June 2008 so that MDA and the Missile Defense Executive Board could use the information during the formulation of the fiscal year 2010 budget. However, until the MDA's fiscal year 2010 budget is presented to Congress, we are unable to assess the extent to which the agency's investments are reflective of the commands' priorities. MDA's approach to establishing baselines has limited the ability for DOD and congressional decision makers to measure MDA's progress on cost, schedule, and testing; however, new DOD initiatives could help improve acquisition accountability. Baselines are starting points that are used to measure progress on cost, schedule, and testing. Tracking progress against a baseline can signal when a program is diverting from its planned budget and schedule. Overall, the Ballistic Missile Defense System does not have baselines that are useful for oversight. Specifically, cost baselines have not been established, test baselines remain relatively unstable, and production and fielding are outpacing testing and modeling. MDA has not yet established cost baselines that are useful to hold the agency accountable for how it expends resources, but has indicated that it is taking steps to do so. Baselined total costs and unit costs are fundamental markers most programs use to measure performance. However, MDA's unique roles and missions exempted the agency from a requirement to establish baselines for total or unit costs. As a result, in March 2009 we reported for the sixth consecutive year that we were unable to assess MDA's actual costs against baseline costs. However, in response to recommendations in our March 2009 report, MDA agreed to provide total cost baselines for its block structure, which describes the agency's approach to acquiring and delivering new increments of ballistic missile defense capabilities to the services and combatant commands for operational use. While Block 1 capabilities (to defend the United States from a limited, long-range North Korean attack) will not be baselined, MDA has agreed to submit cost baselines for Block 2 capabilities (to defend U.S. forces and allies from short- to medium-range threats in one theater) and portions of Block 3 capabilities (to expand the defense of the United States to include limited threats from Iran) as part of its submission to the President's fiscal year 2010 budget, expected in Spring 2009. MDA also stated that it will submit total cost baselines for the rest of Block 3 and all of Block 5 capabilities (to expand the defense of U.S. forces and allies) by the spring of 2010. MDA also has made some progress with developing a schedule baseline for its blocks and their associated capabilities, but has faced challenges in meeting this baseline. MDA identifies its schedule baseline as the fiscal year dates for early, partial, and full capability deliveries of hardware and functionality for a block; as a result, schedule changes and their effects on the Ballistic Missile Defense System's development can be determined by comparing the changes with the original schedule. However, by trying to conform to the schedule baseline, production and fielding decisions have outpaced testing and modeling. Specifically, MDA determines the capability levels of individual elements through a formal declaration process that is based on a combination of models, simulations, and ground tests that are all anchored to flight test data. However, flight test cancellations and delays have resulted in MDA revising and reducing the basis it uses to declare when missile defense capabilities can be considered for operational use. As a result, recent fielding decisions have been made with a more limited understanding of system effectiveness than planned. MDA's testing baselines also have not been effective for oversight, but a new MDA initiative to review its testing program could lead to improvements. In our March 2009 report, we found that MDA's officially approved test baseline, the Integrated Master Test Plan, changes frequently, often because MDA has changed the substance of a test, the timing of a test, or added new tests to the baseline. For example, based on its September 2006 plan, MDA had expected the Ground-based Midcourse Defense element to conduct seven interceptor flight tests from the start of fiscal year 2007 through the first quarter of 2009. However, MDA was only able to conduct two of these flight tests. As a result of these frequent changes, we concluded that MDA's test baseline is therefore not effective for oversight. Recognizing the challenges to the testing program, in February 2009, the Director, MDA testified before this Subcommittee that the agency is undertaking a review of its program. This review, according to MDA, will identify critical variables that have not been proven to date, determine what test scenarios are needed to collect the relevant test data, and develop an affordable and prioritized schedule of flight and ground tests. If MDA's review accomplishes its intended goals, then it could both improve oversight and help close the gaps that exist between testing, modeling, and simulation. In our March 2009 report, we made several recommendations to MDA that would improve its preparation of cost, schedule, and testing baselines, which are needed to help decision makers in DOD and Congress to exercise oversight of MDA's acquisition approach. For example, in the area of cost we recommended that MDA complete total cost baselines before requesting additional funding for Blocks 2 and 3. Regarding schedule baselines, we recommended that MDA synchronize the development, manufacturing, and fielding schedules of Ballistic Missile Defense System assets with the testing and validation schedules to ensure that items are not fielded before their performance has been validated through testing. In the testing area, we recommended that MDA reassess its flight tests scheduled for the end of fiscal year 2009 to ensure that they can be reasonably conducted. DOD generally concurred with all 11 of our recommendations. DOD has taken some initial steps to plan for long-term operations and support of ballistic missile defense operations, but planning efforts to date are incomplete because of difficulties in transitioning responsibilities from MDA to the services and in establishing operation and support cost estimates. Our prior work has shown that clear roles and responsibilities can improve outcomes by identifying who is accountable for various activities. However, in September 2008, we reported that DOD had not identified clear roles and responsibilities among MDA and the services for long-term support planning. In our September 2008 report we recommended that DOD establish a process for long-term support planning that adheres to key principles for life cycle management. This includes establishing timelines for planning that must be completed before each element is fielded, involving services in support and transition planning and deciding when support responsibilities will be transitioned to the services, specifying roles and responsibilities for MDA and the services for life cycle management, and identifying who is accountable for ensuring these actions are accomplished. Since our September 2008 report was issued, DOD has made some progress in planning for transition of some ballistic missile defense elements. For example, in January 2009 MDA and the Army agreed on the overarching terms and conditions for the transition and transfer of elements from MDA to the Army, including Ground-based Midcourse Defense, Terminal High Altitude Area Defense, and the AN/TPY-2 Forward-based Radar. However, the agreement neither identifies when these elements are expected to transfer to the Army, nor addresses the specific details on how operations and support costs will be funded following the transfer. Until DOD establishes a transition and transfer process that adheres to key principles for life cycle management, DOD will be unable to ensure that individual elements will be sustained in the long term, and DOD's long-term support planning will continue to face challenges. Moreover, DOD has established limited operation and support cost estimates for ballistic missile defense elements, and the estimates that have been developed are not transparent to DOD senior leadership and congressional decision makers. DOD has not required that full cost estimates for ballistic missile defense operations and support be developed, validated, and reviewed. As a result, the Future Years Defense Plan--DOD's 6-year spending plan--does not fully reflect these costs. Prior GAO work has shown that operations and support costs are typically 70 percent of a weapon's life cycle costs. Specifically, our work found that DOD has not addressed ballistic missile defense operation and support costs in the following three ways: First, in our September 2008 report, we found that MDA and the services have jointly developed and agreed on cost estimates for only two of the seven elements we examined. Joint cost estimates for the other five elements are not yet complete and are likely to change over time, perhaps significantly, because MDA and the services are still determining key assumptions, such as how support will be provided-- by contractor, the service, or a combination of the two--and where some elements may be fielded and operated. These determinations will affect military construction and operation and support costs, such as maintenance, base operating support, and facilities. Second, in September 2008 we found that DOD did not plan to independently verify the operation and support cost estimates for all the ballistic missile defense elements we reviewed. Independently validated cost estimates are especially important to formulating budget submissions because, historically, cost estimates created by weapon system program offices are lower than those that are created independently. In January 2009, MDA and the Army agreed in principle that full, independently verified life cycle cost estimates may be among the criteria for transferring elements to the Army. However, as of February 2009, DOD had not developed plans to prepare these estimates. Table 1 shows whether, as of February 2009, the joint operation and support cost estimates have been completed, whether the cost estimates have been independently verified, and the status of the joint estimates. Third, we reported in September 2008 that decision makers' visibility of ballistic missile defense operation and support costs was further hindered because MDA and the services had agreed only on which organization is responsible for funding operation and support costs after fiscal year 2013 for two of the seven elements we reviewed-- Aegis Ballistic Missile Defense and Upgraded Early Warning Radar. It is still unclear how DOD intends to fund long-term operations and support costs. Although the MDA and Navy agreed in January 2009 on how to fund operation and support costs for the Sea-Based X-Band Radar through 2013, the agreement does not specify whether these costs will be funded through the defensewide fund or through a transfer of MDA's appropriated funds to the Navy after that time. Additionally, in February 2009 Army and Air Force officials told us that the services had not reached agreements with MDA about how to fund operation and support costs beyond 2013 for four of the seven elements we reviewed. As a result of these limitations, DOD and the services would face unknown financial obligations for supporting ballistic missile defense fielding plans and that most of these costs would not be reflected in DOD's future years' spending plan for fiscal years 2010 through 2015. To address these cost transparency challenges, we recommended that DOD establish a requirement to estimate ballistic missile defense operation and support costs, including detailing when credible estimates are to be developed, updated, and reviewed, and requiring periodic independent validation of operation and support costs for each element. In its response to our recommendations, DOD stated that it has established a new ballistic missile defense life cycle management process to oversee the annual preparation of a required capabilities portfolio and a program plan to meet those requirements through defensewide accounts. This process is intended in part to provide decision makers with clear, credible, and transparent cost information. DOD has recently taken some steps to improve oversight of the development of the Ballistic Missile Defense System, such as the creation of both the Missile Defense Executive Board and its life cycle management process, but obstacles remain. For example, DOD's actions do not yet provide comprehensive information for acquisition oversight; and have not yet clearly defined the roles and responsibilities of MDA and the services, including how defensewide accounts will be used to fund the ballistic missile defense program over the long term. Additionally, as DOD seeks to improve transparency and accountability, sustained top leadership will be needed to build upon this recent progress. Establishment of a new Missile Defense Executive Board in 2007 has been a step forward in improving transparency and accountability. The board is chartered to review and make recommendations on MDA's acquisition strategy, plans, and funding. One step the board has taken to improve transparency and accountability was its adoption of its life cycle management process, a process designed to clarify the ballistic missile defense roles of MDA, the services, combatant commands, and Office of the Secretary of Defense. Additionally, the Under Secretary of Defense for Acquisition, Technology, and Logistics has directed MDA to take actions based on Missile Defense Executive Board recommendations. For example, the Under Secretary directed MDA to incorporate into its budget proposal the interceptor inventory recommended by a Joint Staff study and endorsed by the Missile Defense Executive Board. Although the establishment of the Missile Defense Executive Board represents progress, this new board does not yet provide comprehensive acquisition oversight of the ballistic missile defense program. As we reported in March 2009, the Under Secretary of Defense for Acquisition, Technology, and Logistics plans to hold program reviews for several Ballistic Missile Defense System elements to further increase acquisition oversight of the Ballistic Missile Defense System. According to DOD officials, these reviews are designed to provide comprehensive information that will be used as the basis for Missile Defense Executive Board recommendations for the Ballistic Missile Defense System business case and baseline process--a process which, according to these officials, is similar to the traditional Defense Acquisition Board process for reviewing other major acquisition programs. However, it is unclear whether the information provided to the Missile Defense Executive Board will be comparable to that produced for other major acquisition program reviews, as most of the information appears to be derived or presented by MDA as opposed to independent sources as required for traditional major defense acquisition programs. Additionally, the Missile Defense Executive Board's life cycle management process is intended to facilitate more detailed agreements between MDA and the services to clearly establish their respective roles and responsibilities; however, these efforts are still in their early stages. For example, although MDA is developing memorandums of agreement with the services, the annexes that would lay out the specific responsibilities for such things as planning, programming, budgeting, execution, and life cycle management for each ballistic missile defense element have yet to be completed. Further, the annexes are expected to provide details about the how the services and MDA will work more closely together to manage the elements through joint program offices. The MDA Director told us that these new program offices would provide the services greater influence in the design of ballistic missile defenses. We have previously reported that early involvement by the services is important, because weapons design influences long-term operations, support, and costs--responsibilities likely borne by the services, not MDA. A potential area of concern between MDA and services could be centered around how DOD will use the defensewide accounts established in the life cycle management process to fund the ballistic missile defense program over the long term. The defensewide accounts are intended to pay for ballistic missile defense costs other than those already agreed to be paid by the services, including research and development, procurement, and operations and support costs. In September 2008, we reported that the Missile Defense Executive Board's life cycle management process lacked concrete details for implementation and was not well defined. In theory, the defensewide accounts would allow all costs to be clearly identified and would alleviate the pressure on the services' budgets to fund operation and support for ballistic missile defense programs. However, MDA and the services have not yet determined the amount and duration of funding for the individual ballistic missile defense elements that will come from the defensewide accounts. While DOD has recently been taking positive steps to improve transparency and accountability for ballistic missile defense programs, long-term success will require sustained involvement by top DOD leadership. Leadership and oversight of missile defense has been sporadic in the past. DOD had a senior-level group, called the Missile Defense Support Group, dedicated to the oversight of MDA since the agency's founding that met many times initially; however, it did not meet after June 2005. This leadership vacuum was not filled until the Missile Defense Executive Board was established 2 years later. The Missile Defense Executive Board has a more robust charter than its predecessor, and an additional strength of the board is that its chair, the Under Secretary of Defense for Acquisition, Technology, and Logistics, used it as his primary oversight tool over the last year. In sum, whether or not DOD continues to manage missile defense outside its customary acquisition processes, the management challenges we have found in our work will need to be addressed. Sustained DOD leadership will be required to ensure that the needs of combatant commands are considered, that acquisition is adequately managed and overseen, and that planning occurs for the long-term operations and support of these multi- billion dollar systems. Madam Chairman and Members of the Subcommittee, this concludes my prepared remarks. I would be happy to answer any questions you or other Members of the Subcommittee may have. John H. Pendleton, (202) 512-3489, [email protected] In addition to the contact named above, Marie A. Mak, Assistant Director; David Best; Renee S. Brown; Tara Copp Connolly; Nicolaas C. Cornelisse; Kasea L. Hamar; Ronald La Due Lake; Jennifer E. Neer; Kevin L. O'Neill, Analyst in Charge; and Karen D. Thornton made key contributions to this report. Defense Acquisitions: Production and Fielding of Missile Defense Components Continue with Less Testing and Validation Than Planned. GAO-09-338. Washington, D.C.: March 13, 2009. Defense Acquisitions: Charting a Course for Improved Missile Defense Testing. GAO-09-403T. Washington, D.C.: February 25, 2009. Defense Acquisitions: Sound Business Case Needed to Implement Missile Defense Agency's Targets Program. GAO-08-1113. Washington, D.C.: September 26, 2008. Missile Defense: Actions Needed to Improve Planning and Cost Estimates for Long-Term Support of Ballistic Missile Defense. GAO-08-1068. Washington, D.C.: September 25, 2008. Ballistic Missile Defense: Actions Needed to Improve the Process for Identifying and Addressing Combatant Command Priorities. GAO-08-740. Washington, D.C.: July 31, 2008. Defense Acquisitions: Progress Made in Fielding Missile Defense, but Program Is Short of Meeting Goals. GAO-08-448. Washington, D.C.: March 14, 2008. Missile Defense: Actions Needed to Improve Information for Supporting Future Key Decisions for Boost and Ascent Phase Element. GAO-07-430. Washington, D.C.: April 17, 2007. Defense Acquisitions: Missile Defense Acquisition Strategy Generates Results, but Delivers Less at a Higher Cost. GAO-07-387. Washington, D.C.: March 15, 2007. Defense Management: Actions Needed to Improve Operational Planning and Visibility of Costs for Ballistic Missile Defense. GAO-06-473. Washington, D.C.: May 31, 2006. Defense Acquisitions: Missile Defense Agency Fields Initial Capability but Falls Short of Original Goal. GAO-06-327. Washington, D.C.: March 15, 2006. Defense Acquisitions: Actions Needed to Ensure Adequate Funding for Operation and Sustainment of the Ballistic Missile Defense System. GAO-05-817. Washington, D.C.: September 6, 2005. Defense Acquisitions: Status of Ballistic Missile Defense Program in 2004. GAO-05-243. Washington, D.C.: March 31, 2005. Missile Defense: Actions Are Needed to Enhance Testing and Accountability. GAO-04-409. Washington, D.C.: April 23, 2004. Missile Defense: Actions Being Taken to Address Testing Recommendations, but Updated Assessment Needed. GAO-04-254. Washington, D.C.: February 26, 2004. Missile Defense: Additional Knowledge Needed in Developing System for Intercepting Long-Range Missiles. GAO-03-600. Washington, D.C.: August 21, 2003. Missile Defense: Alternate Approaches to Space Tracking and Surveillance System Need to Be Considered. GAO-03-597. Washington, D.C.: May 23, 2003. Missile Defense: Knowledge-Based Practices Are Being Adopted, but Risks Remain. GAO-03-441. Washington, D.C.: April 30, 2003. Missile Defense: Knowledge-Based Decision Making Needed to Reduce Risks in Developing Airborne Laser. GAO-02-631. Washington, D.C.: July 12, 2002. Missile Defense: Review of Results and Limitations of an Early National Missile Defense Flight Test. GAO-02-124. Washington, D.C.: February 28, 2002. Missile Defense: Cost Increases Call for Analysis of How Many New Patriot Missiles to Buy. GAO/NSIAD-00-153. Washington, D.C.: June 29, 2000. Missile Defense: Schedule for Navy Theater Wide Program Should Be Revised to Reduce Risk. GAO/NSIAD-00-121. Washington, D.C.: May 31, 2000. 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. 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To more quickly field ballistic missile defenses, the Missile Defense Agency (MDA) has been exempted from traditional Department of Defense (DOD) requirements development, acquisition, and oversight processes since its creation in 2002. Instead, MDA has unique roles and missions to develop and field weapon systems that address a variety of ballistic missile threats. To date, MDA has spent about $56 billion and plans to spend about $50 billion more through 2013 to develop an integrated Ballistic Missile Defense System. The system consists of a layered network of capabilities that includes defensive components such as sensors, radars, interceptors, and command and control. In reviews of DOD's approach to acquire, operate, and maintain ballistic missile defense systems, GAO has previously reported on several challenges that have stemmed from the broad flexibilities provided to MDA. This testimony summarizes the challenges facing DOD in acquiring and operating its ballistic missile defense systems and describes DOD's efforts to improve transparency and accountability. This statement is based primarily on previously issued GAO reports and testimonies. GAO also reviewed documents and interviewed key officials to update past work and identify DOD and MDA efforts to address previous recommendations. While MDA's exemption from traditional DOD processes allowed it to quickly develop and field an initial ballistic missile defense capability, this approach has led to several challenges. DOD now has an opportunity to better balance the flexibility inherent in MDA's unique roles with the need for effective management and oversight of ballistic missile defense programs. Furthermore, the start of a new administration and the appointment of a new MDA Director offer DOD the chance to more fully address the challenges identified in GAO's prior work. These include the following: (1) Incorporating Combatant Command Priorities: While DOD established a process in 2005 to address the combatant commands' needs for ballistic missile defense capabilities, GAO reported in 2008 that the process was evolving and had yet to overcome key limitations to its effectiveness, including the need for more effective methodologies to clearly identify and prioritize the combatant commands' needs. Additionally, when developing ballistic missile defenses, MDA lacked a departmentwide perspective on which of the commands' needs were most significant. (2) Establishing Adequate Baselines to Measure Progress: MDA's flexible acquisition approach has limited the ability for DOD and congressional decision makers to measure MDA's progress on cost, schedule, and testing. Specifically, as GAO reported in March 2009, MDA's baselines have been inadequate to measure progress and hold MDA accountable. However, GAO also reported that new MDA initiatives to improve baselines could help improve acquisition accountability. (3) Planning for Long-Term Operations and Support: DOD has taken initial steps to plan for ballistic missile defense support, but efforts to date are incomplete as difficulties in transitioning responsibilities from MDA to the services have complicated long-term planning. Additionally, although operation and support costs are typically 70 percent of a weapon system's life cycle costs, DOD has not required that full cost estimates for ballistic missile defense operations and support be developed and validated, and DOD's 6-year spending plan does not fully reflect these costs. DOD has recently taken some steps to improve transparency and accountability of ballistic missile defense programs, such as the creation of a Missile Defense Executive Board to provide top level oversight and a life cycle management process that established defensewide funding accounts. Although these are positive steps, they do not yet provide comprehensive information for acquisition oversight; and have not yet clearly defined the roles and responsibilities of MDA and the services, including how the defensewide account will be used to fund the ballistic missile defense program over the long term. As DOD seeks to improve transparency and accountability, sustained top leadership will be needed to build upon this recent progress.
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Since the early 1990s, state agencies and private companies have set up hundreds of residential programs and facilities in the United States. Many of these programs are intended to provide a less restrictive alternative to incarceration or hospitalization for youth who may require intervention to address emotional or behavioral challenges. A wide array of government or private entities, including government agencies and faith-based organizations, operate these programs. Some residential programs advertise themselves as focusing on a specific client type, such as those with substance abuse disorders or suicidal tendencies. As we reported in our October 2007 testimony, no federal laws define what constitutes a residential program, nor are there any standard, commonly recognized definitions for specific types of programs. For our purposes, we define programs based on the characteristics we have identified during our work. For example: Wilderness therapy programs place youth in different natural environments, including forests, mountains, and deserts. According to wilderness therapy program material, these settings are intended to remove the "distractions" and "temptations" of modern life from teens, forcing them to focus on themselves and their relationships. These programs are typically 28 days in length at a minimum, but parents can continue to enroll their child for longer at an additional cost. Boot camps are residential programs in which strict discipline and regime are dominant principles. Many boot camps emphasize behavioral modification elements, and some military-style boot camps also emphasize uniformity and austere living conditions. Boot camps might be included as part of a wilderness therapy school or therapeutic boarding, but many boot camps exist independently. These programs are offered year-round and some summer programs last up to 3 months. Boarding schools (also called academies) are generally advertised as providing academic education beyond the survival skills a wilderness therapy program might teach. These programs frequently enroll youth whose parents force them to attend against their will. The schools can include fences and other security measures to ensure that youth do not leave without permission. While these programs advertise year-round education, the length of stay varies for each student; contracts can require stays of up to 21 months or more. Ranch programs typically emphasize remoteness and large, open spaces available on program property. Many ranch programs advertise the therapeutic value of ranch-related work. These programs also generally provide an opportunity for youth to help care for horses and other animals. Although we could not determine the length of a typical stay at ranch programs, they operate year-round and take students for as long as 18 months. See appendix I for further information about the location of various types of residential programs across the United States. In addition to these programs, the industry includes a variety of ancillary services. These include referral services and educational consultants to assist parents in selecting a program, along with transport services to pick up a youth and bring him or her to the program location. Parents frequently use a transport service if their child is unwilling to attend the program. Private programs generally charge high tuition costs. For example, one wilderness program stated that their program costs over $13,000 for 28 days. In addition to tuition costs, these programs frequently charge additional fees for enrollment, uniforms, medical care, supplemental therapy, and other services--all of which vary by program and can add up to thousands of extra dollars. Costs for ancillary services vary. The cost for transport services depends on a number of factors, including distance traveled and the means of transportation. Referral services do not charge parents fees, but educational consultants do and typically charge thousands of dollars. Financial and loan services are also available to assist parents in covering the expense of residential programs and are often advertised by programs and referral services. See appendix II for further information about the cost of residential programs across the United States. There are no federal oversight laws--including reporting requirements-- pertaining specifically to private residential programs, referral services, educational consultants, or transportation services, with one limited exception. The U.S. Department of Health and Human Services oversees psychiatric residential treatment facilities (PRTFs) receiving Medicaid funds. In order to be eligible to receive funds under Medicaid, PRTFs must abide by regulations that govern the use of restraint and seclusion techniques on patients. They are also required to report serious incidents to both state Medicaid agencies and, unless prohibited by state law, state Protection and Advocacy agencies. In addition, the regulations require PRTFs to report patient deaths to the Centers for Medicare and Medicaid Services Regional Office. In the eight closed cases we examined, ineffective management and operating practices, in addition to untrained staff, contributed to the death and abuse of youth enrolled in selected programs. Furthermore, two cases of death were very similar to cases from our October 2007 testimony, in that staff ignored the serious medical complaints of youth until it was too late. The practice of physical restraint figured prominently in three of the cases. The restraint used for these cases primarily involved one or more staff members physically holding down a youth. Ineffective operating practices led to the most egregious cases of death and abuse, as the cases exposed problems with the entire operation of the program. Specifically, the failure of program leaders to ensure that appropriate policies and procedures were in place to deal with the serious problems of youth; ineffective management practices that led to questionable therapeutic or operational practices; and the failure of the program to share information about enrolled youth with the staff members who were attending to them created the environments that resulted in abuse and death. Moreover, in cases involving abuse, the abuse was systemic in the program and not limited to the incident discussed in our case studies. In three of the eight cases we examined, the victim was placed in the program by the state or in consultation with state authorities. See table 1 for a summary of the cases of death we examined. See table 2 for a summary of the cases of abuse we examined. For reporting purposes, we continue the numbering of case studies in this table, starting with five. The following three narratives describe selected cases in further detail. The victim, who died in 2005, was a 12-year-old male. Documents obtained from the Texas Department of Family and Protective Services indicate that the victim had a troubled family background. He was taken into state care along with his siblings at the age of 6. According to child protective service workers who visited the family's home, the victim and his siblings were found unsupervised and without electricity, water, or food. Some of the children were huddled over a space heater, which was connected to a neighbor's house by extension cord, in order to keep warm. As a ward of the state, the victim spent several years in various foster placements and youth programs before being placed in a private residential treatment center in August 2005. The program advertised itself as a "unique facility" that specialized in services for boys with learning disabilities and behavioral or emotional issues. The victim's caretakers chose to place him in this program because he was emotionally disturbed. Records indicate that he was covered by Medicaid. On the evening of his death, the victim refused to take a shower and was ordered to sit on an outside porch. According to police reports, the victim began to bang his head repeatedly against the concrete floor of the porch, leading a staff member to drag him away from the porch and place him in a "lying basket restraint" for his own protection. During this restraint, the 4 feet 9 1/2 inch tall, 87-pound boy was forced to lie on his stomach with his arms crossed under him as the staff member, a muscular male 5 feet 10 inches tall, held him still. Some of the children who witnessed the restraint said they saw the staff member lying across the victim's back. During the restraint, the victim fought against the staff member and yelled at him to stop. The staff member told police that the victim complained that he could not breathe, but added that children "always say that they cannot breathe during a restraint." According to police reports, after about 10 minutes of forced restraint, the staff member observed that the victim had calmed down and was no longer fighting back. The staff member slowly released the restraint and asked the victim if he wanted a jacket. The victim did not respond. The staff member told police he interpreted the victim's silence as an unwillingness to talk due to anger about the restraint. He said he waited for a minute while the victim lay silently on the ground. When the victim did not respond to his question a second time, he tapped the victim on the shoulder and rolled him over. The staff member observed that the victim was pale and could not detect a pulse. All efforts to revive the victim failed, and he was declared dead at a nearby hospital. When the staff member demonstrated his restraint technique for the police, they found that his technique violated the restraint policies of the program. These policies prohibited staff from placing any pressure on the back of a person being restrained. The report added that this staff member was reprimanded for injuring a youth in 2002 as a result of improper restraint. After this incident, program administrators banned the staff member from participating in restraints for 1 month. The reprimand issued by program administrators over this incident noted that the staff member had actually trained other staff members in performing restraints, making the matter more serious. The police reports also cite one of the staff member's performance evaluations that noted that he had problems with his temper. According to the reports, one of the youth in the program said the staff member could become agitated when putting youth in restraint. Although the Texas Department of Family and Protective Services alleged that the victim's death was due to physical abuse, the official certificate of death stated that it was an accident and a grand jury declined to press charges against the staff member performing the restraint. However, the victim's siblings obtained a civil settlement against the program and the staff member for an undisclosed amount. The program remained open until May 2006, when a 12-year-old boy drowned on a bike outing with the program. According to records from law enforcement, child protection workers, and the program, the boy fell into the water of a rain-swollen creek and was sucked into a culvert. He died after several weeks on life support. The Texas Department of Family and Protective Services cited negligent staff supervision in its review of this second death and revoked the program's license to operate as a residential treatment center. However, the program's directors also ran a summer camp for children with learning disabilities and social disorders licensed by the Texas Department of State Health Services, until they resigned from their positions in March 2008. The victim was 16 years old when he died, in February 2006, at a private psychiatric residential treatment facility in Pennsylvania for boys with behavioral or emotional problems. He was a large boy--6 feet 1 inch in height and weighing about 250 pounds--and suffered from bipolar disorder and asthma. The cost for placement in this facility was primarily paid for by Medicaid. According to state investigative documents we obtained, the victim was placed in intensive observation after he attempted to run away. As part of the intensive observation, he was forced to sit in a chair in the hallway of the facility and was restricted from participating in some activities with other residents. On the day of his death, staff allowed the victim to participate in arts, crafts, and games with the other youth, but would not let him leave the living area to attend other recreational activities. Instead, staff told the victim that he would have to return to his chair in the hallway. In addition, staff told him that he would have to move his chair so that he could not see the television in another room. The victim complied, moving his chair out of view of the television, but put up the hood of his sweatshirt and turned his back toward the staff. The staff ordered him to take down his hood but he refused. When one of the staff walked up to him and pulled his hood down, the victim jumped out of his chair and made a threatening posture with his fists, saying he did not want to be touched. The staff member and two coworkers then brought the victim to another room and held him facedown on the floor with his arms pulled up behind his back. The victim struggled against the restraint, yelling and trying to kick the three staff members holding him down. After about 10 minutes, the victim became limp and started breathing heavily. He complained that he was having difficulties breathing. One staff member unzipped his sweatshirt and loosened the collar of his shirt, but rather than improve, the victim became unresponsive. The staff called emergency services and began CPR. The victim was taken by ambulance to a hospital, where he died a little more than 3 hours later. In the victim's autopsy report his death was ruled accidental, as caused by asphyxia and an abnormal heartbeat (cardiac dysrhythmia). Following the victim's death, an investigation by the Pennsylvania Department of Health found that the policies and procedures for youth under intense observation do not prohibit them from watching television, nor do they require that youth keep their face visible to staff at all times. The investigation also found that the facility had documentation of the victim's history of asthma, and that its training manual for restraint procedures cautioned against the risk of decreased oxygen intake during restraints for children with asthma. However, all three staff members involved in the restraint told investigators that they were unaware of any medical conditions that needed to be considered when restraining the victim. In addition, the investigation found that the facility did not provide timely training on the appropriate and safe use of restraint. The state's Protection and Advocacy organization, Pennsylvania Protection & Advocacy, Inc. (PP&A), conducted its own investigation of the facility and found that staff members inappropriately restrained children in lieu of appropriate behavioral interventions, which resulted in neglect and abuse. Of the 45 residents interviewed by PP&A investigators, 29 said that staff at the facility subjected them to restraints. The residents reported that the restraints could last as long as 90 minutes and caused breathing difficulties. They also stated that staff often placed their knees on residents' backs and necks during restraints. One resident reported that the blood vessels in his eyes "popped" during a restraint. Another resident said that his nose hit the ground during the restraint, causing him to choke on his own blood. Further, some of the residents reported that staff provoked them and that staff did not make any effort to de-escalate the provocations before implementing a restraint. No criminal charges were filed in regard to the victim's death. The victim's mother filed a civil suit over her son's death against the facility, which is currently pending. Her son's death was not the only fatal incident at this facility. Only 2 months before the victim's death, in December 2005, a 17- year-old boy collapsed at the facility after a physical education class, and later died at a nearby hospital. His death was attributed to an enlarged heart. This facility remains open. This abuse victim was sent to a private drug and addiction treatment program in July 1994 at the age of 14. He was attending public school in the major metropolitan area where his family lived. The abuse victim told us that he had problems at school, including poor grades, truancy, a fight with other students, and that he had been suspended. After the victim was questioned by police about an assault on a girl at his school, a family friend with ties to the behavior modification program recommended the program to the victim's parents. According to the victim, his first visit to the school turned into an intense intake session where he was interviewed by two program patients. Although the victim denied using drugs, the interviewers insisted that he was not being honest. After about 6 hours of questioning, the victim told the interviewers what he thought they wanted to hear--that he was smoking pot, did cocaine, and cut school to get high--so that he could end the interview. The interviewers used these statements to convince the victim's parents to sign him into the program for immediate intervention and treatment. He ended up staying in the program for the next 4 years--even after he turned 18 and was held against his will. According to program records, the program's part-time psychiatrist did not examine or diagnose him until he had been in the program for 14 days. This lack of psychological care continued, as program records indicate he was examined by the psychiatrist only four times during his entire stay. He was restrained more than 250 times while in the program, with at least 46 restraints lasting one hour or longer. The victim said some restraints were applied by a group of four or five staff members and fellow patients. According to the victim, they held him on his back, with one person holding his head and one person holding each limb. These restraints were imposed whenever the victim showed any reluctance to do what he was told, or, the victim told us, for doing some things without first obtaining permission from program staff. On one occasion, while he was staying with a host family and other patients, he attempted to escape from the program. The victim claims that they restrained him by wrapping him in a blanket and tying him up. According to the victim, when he turned 18, he submitted a request to leave the program but his request was denied because he had not followed the proper procedure and was a danger to himself. For expressing his desire to leave the program, he was stripped of all progress he had made to that point, and was prevented from further advancing until the program director decided he was be eligible. Incident reports filed by program staff document that after he had turned 18, the victim was restrained on 26 separate days, with at least two restraints lasting more than 12 hours. According to program rules, failure of the parents to follow program rules and fully support and participate in the program would jeopardize their son's treatment and progress and put him at risk of expulsion. Having been led to believe that the program was the only way to help him overcome his alleged addictions and problems, his family complied with the program's demands. Moreover, the program required parents and siblings over age 8 to attend twice weekly group therapy meetings. According to the victim, these meetings lasted for many hours, sometimes stretching into the early morning. He added that when the victim's father refused to attend the therapy meetings for fear of losing his job, the program told him to quit. When he would not quit his job or miss work to attend the meetings, the victim said that the program convinced his mother to leave her husband. After his parents separated, the program would not allow the victim to have contact with his father. The victim said that the program never told the victim's family that all the drug tests they performed on him returned negative results, including the initial tests done when he entered the program. In February 1998, the State of New Jersey terminated the program's participation in the Medicaid program, holding that the program did not qualify as a children's partial care mental health program because of its noncompliance with client rights standards and its failure to meet various staff requirements, such as staff-to-client ratios and requisite education and experience levels for staff. The program subsequently closed in November 1998, citing financial problems. About a year later, in September 1999, an administrative law judge rejected an appeal by the program to overrule the state's termination of its Medicaid participation. The judge noted in his decision that the program effectively operated as a full-time residential facility. Moreover, he noted that all group staff at the program were either current or former patients, and only two members of the program staff met the educational requirements to qualify as direct- care professionals. The victim filed a civil lawsuit against the program, director, and a psychiatrist, which resulted in a $3.75 million settlement. Other civil suits filed by former patients included one patient who was committed to the program at the age of 13 and spent 13 years in the program. This patient reached a similar settlement against the program, director, and psychiatrists for the sum of $6.5 million. In addition, a third former patient secured a $4.5 million settlement against the program, director, and psychiatrists. Posing as fictitious parents with fictitious troubled teenagers, we found examples of deceptive marketing and questionable practices related to 10 private residential programs and 4 referral services. The most egregious deceptive marketing practices related to tax incentives and health insurance reimbursement, and were intended to make the high price of the programs appear more manageable for our fictitious parents. We also found examples of false statements and misleading representations related to a range of issues including education and admissions, as well as undisclosed conflicts of interest. In addition, we identified examples of questionable practices related to the health of youth enrolled in programs and the method of convincing reluctant parents to enroll their children. Although general consumer protection laws apply to these programs and services, there are no federal laws or regulations on marketing content and practices specific to the residential program industry. A link to selected audio clips from these calls is available at: http://www.gao.gov/media/video/gao-08-713t/. See table 3 for a selection of representations made by programs and referral agents. Case 1: One of our fictitious parents called this foundation pretending to be a parent who could not afford the cost of a residential program for his child. A representative of the foundation explained that their "most popular" method of fund-raising involved the friends and relatives of the enrolled youth making tax-deductible donations to the foundation, which in turn credited 90 percent of these "donations" specifically to pay for tuition in a program the child was attending. The foundation assigns a code number to each child, which parents ensure is listed on the donation checks. The representative also provided a fund-raising packet by mail that instructs the parents of troubled teens: "You are able to contact family, friends, business acquaintances, affiliates, churches, and professional/fraternal organizations that you know. Don't forget corporate matching funds opportunities from your employer too." The packet also included two template letters to send in soliciting the funds. According to an IRS official with the Tax Exempt and Governmental Entities Division, this practice is inappropriate and represents potential tax fraud on the part of the foundation. Furthermore, those who claim inappropriate deductions in this fashion would be responsible for back taxes, as well as penalties and interest. Based on this information, we referred this nonprofit foundation to the IRS for criminal investigation. Case 2: The program representative at a Montana boarding school told our fictitious parent that they must submit an application form before their child can be accepted to the school. However, after a separate undercover call made to this school by one of our fictitious parents, the program representative e-mailed us stating that our fictitious daughter had been approved for admission into the program and subsequently sent an acceptance letter. The acceptance letter stated that our fictitious child "has been approved for our school here in Montana." This admission was based entirely on one 30-minute telephone conversation, in which our fictitious parent described his daughter as a 13-year-old who takes the psychotropic medication Risperdal, attends weekly therapy sessions, has bipolar disorder, and been diagnosed with Reactive Attachment Disorder. We did not fill out an application form for the school. Moreover, this program had previously recommended that our fictitious parents seek advice from the 501(c)(3)foundation discussed in Case 1 to help finance the cost of the program. It appears that parents do not have assurance about the integrity of the admissions process at this boarding school. Case 4: One fictitious parent asked the representative for a Texas wilderness therapy program whether there was any possibility that a health insurance company would cover the cost of the program. The representative replied that, at the completion of the program, the bookkeeper for the program would generate an itemized statement of billable charges that could be submitted to an insurance company for reimbursement. She emphasized that we should not call ahead of time to seek pre-approval, because then we would be "up the creek." She added that this was "just the way insurance companies like it" and stated that health insurance companies reimburse "quite a bit." She gave an example of one insurance company that reimbursed for over $11,000--almost the entire cost of the 28-day wilderness program. Representatives for both a health care insurer and a behavioral health company told us that parents who follow this advice run a real risk of not being reimbursed, especially if the health insurance company requires pre-approval of counseling or other mental health services. In this case, our fictitious parent was being led into believing that a large portion of the tuition for the program would be covered by health insurance even if pre-approval for the charges was not obtained in writing in advance of the services. Case 6: One referral agent we called stated that behavioral modification schools are "specialty schools" and that tuition costs are tax deductible under Section 213 of the Internal Revenue Tax code. The referral agent also stated that transportation costs related to bringing our fictitious child to and from the school were tax deductible under this section. However, the two programs recommended by the referral service do not appear to meet the requirements of IRS regulations for special schools. Our review of Section 213 of the Internal Revenue Tax code shows that it relates to medical expenses and specifies that, if medical expenses and transportation for treatment exceed 7.5 percent of a taxpayer's adjusted gross income, the excess costs can be deducted on Schedule A of IRS Form 1040. Even if these expenses were deductible under this section, only expenses above 7.5 percent of the adjusted gross income would be deductible, rather than the full amount as suggested by the referral agent. An IRS authority on Section 213 with whom we spoke stated that the referral service provided us with questionable tax advice and that parents should consult a tax advisor before attempting to claim a deduction under this section. Parents improperly taking this deduction could be responsible for back taxes, as well as penalties and interest. Case 9: On its Web site, referral service "B" invites parents to call a toll- free number and states: "We will look at your special situation and help you select the best school for your teen with individual attention." Our undercover investigators called this referral service pretending to be three separate fictitious parents and described three separate fictitious children to the agents who answered the phone. Despite these three different scenarios, we found the referral service recommended the same residential program all three times--a Missouri boot camp. Our investigation into this referral service revealed that the owner of the referral service is the husband of the boot camp owner. This relationship, was not disclosed to our fictitious parents during our telephone calls, which raises the issue of a potential conflict of interest. It appears that parents who call this referral service will not receive the objective advice they expect based on marketing information on the Web site. Mr. Chairman and Members of the Committee, this concludes my statement. We would be pleased to answer any questions that you may have at this time. For further information about this testimony, please contact Gregory D. Kutz at (202) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. In our examination of case studies for this testimony and our prior testimony, we found that the victims of death and abuse came from across the country and attended programs that were similarly located in numerous states. Figure 1 contains a map indicating where victims lived and the location of the program they attended. Private residential programs are located nationwide and rely heavily on the Internet for their marketing. Although Web sites list 48 of the 50 states where parents can find various types of programs, we found that they do not list programs in Nebraska and South Dakota, nor do they indicate the existence of programs in the District of Columbia. Notably, we did not find Web sites that list states with boot camps but instead instruct parents to call for locations and details. Figure 2 illustrates the types of programs and the states in which they are located, excluding boot camps. Our undercover calls to selected programs revealed that most private programs charge a high tuition for their services. Table 4 contains information related to the high cost of these programs based these phone calls. According to program and service representatives with whom we spoke, the basic cost could be discounted. For example, one program told us if parents paid for a full year upfront, they would be given a $200-per-month discount. This does not include fees by transport services for taking a child to a program. Moreover, although program and service representatives quoted these as basic program costs, they also mentioned additional one-time charges, such as an enrollment fee that can be as much as $4,600, uniform costs, or other items such as supplies. In addition, some programs charge extra for therapy, including one-on-one therapy. 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 October 2007, GAO testified before the Committee regarding allegations of abuse and death in private residential programs across the country such as wilderness therapy programs, boot camps, and boarding schools. GAO also examined selected closed cases where a youth died while enrolled in one of these private programs. Many cite positive outcomes associated with specific types of residential programs. However, due to continuing concerns about the safety and well-being of youth enrolled in private programs, the Committee requested that GAO (1) identify and examine the facts and circumstances surrounding additional closed cases where a teenager died, was abused, or both, while enrolled in a private program; and (2) identify cases of deceptive marketing or questionable practices in the private residential program industry. To develop case studies of death and abuse, GAO conducted numerous interviews and examined documents from eight closed cases from 1994 to 2006. GAO used covert testing along with other investigative techniques to identify, for selected cases, deceptive marketing or questionable practices. Specifically, posing as fictitious parents with fictitious troubled teenagers, GAO called 14 programs and related services. GAO did not attempt to evaluate the benefits of private residential programs and its results cannot be projected beyond the specific programs and services that GAO reviewed. In the eight closed cases GAO examined, ineffective management and operating practices, in addition to untrained staff, contributed to the death and abuse of youth enrolled in selected programs. The practice of physical restraint also figured prominently in three of the cases. The restraint used for these cases primarily involved one or more staff members physically holding down a youth. Posing as fictitious parents with fictitious troubled teenagers, GAO found examples of deceptive marketing and questionable practices in certain industry programs and services. For example, one Montana boarding school told GAO's fictitious parents that their child must apply using an application form before they are admitted. But after a separate call, a program representative e-mailed an acceptance letter for GAO's fictitious child even though an application was never submitted. In another example, the Web site for one referral service states: "We will look at your special situation and help you select the best school for your teen with individual attention." However, GAO called this service three times using three different scenarios related to different fictitious children, and each time the referral agent recommended a Missouri boot camp. Investigative work revealed that the owner of the referral service is married to the owner of the boot camp. GAO also called a program established as a 501(c)(3) charity that advocated a potentially fraudulent tax scheme. The scheme involves the friends and family of a child making tax-deductible "donations" to the charity, which are then credited to an account in the program the child is enrolled in. GAO referred this charity to the Internal Revenue Service for criminal investigation.
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Although there have been fluctuations in its funding sources, FAA is primarily supported by the Trust Fund (82 percent), which receives revenues from a series of excise taxes paid by users of the NAS. These excise taxes are associated with purchases of airline tickets and aviation fuel, as well as the shipment of cargo. These Trust Fund revenues are then available for use subject to appropriations. In addition to these revenues, in most years, General Fund revenues have been used to fund FAA. About $2.6 billion was appropriated for fiscal year 2006 from the General Fund for FAA's operations. This amount represents about 18 percent of FAA's total appropriation. The Trust Fund was established by the Airport and Airway Revenue Act of 1970 (P.L. 91-258) to help fund the development of a nationwide airport and airway system. The Trust Fund provides funding for FAA's two capital accounts--the Airport Improvement Program (AIP) and the Facilities and Equipment (F&E) account--which provide grants to airports and funds for modernizing the air traffic control system, respectively. The Trust Fund also provides funding for the Research, Engineering, and Development (RE&D) account and supports part of FAA's Operations account. To fund these accounts, the Trust Fund is credited with revenues collected from system users through the dedicated excise taxes. In fiscal year 2005, the ticket tax was the largest single source of Trust Fund revenue, followed by the international departure and arrival tax, the passenger segment tax, and fuel taxes (see table 1 for a description of current taxes). The administration's reauthorization proposal would change FAA's financing system from one based mainly on excise taxes to one based more on cost-based charges. Under the proposed system, funding for ATO would come primarily from user charges on commercial aircraft and fuel taxes on general aviation aircraft. In addition, contributions from the General Fund would be appropriated to FAA to cover ATO costs of providing services to military and other public aircraft, flight service stations, and a few other services. Funding for AIP, EAS, and part of RE&D would come from an equal fuel tax on both general and commercial aviation and a tax on arriving and departing international passengers. Funding for Safety and Operations would include some fees, but mostly General Fund contributions. The reauthorization proposal would also create an advisory board and give FAA limited borrowing authority. Table 1 compares elements of the current and proposed funding structure for FAA. The administration's proposal also calls for changing FAA's budget structure by establishing two new budget accounts--(1) Air Traffic Organization and (2) Safety and Operations--to align with FAA's lines of business and proposed funding. These two new accounts would replace the Operations and F&E accounts. The proposal retains the AIP and RE&D accounts. See table 2 for a comparison of the current and proposed FAA budget structure. In January 2007, FAA released a new cost allocation study. This report sets forth a methodology for assigning air traffic costs to user groups on the basis of aircraft type. The two principal user groups are the high- performance group, which includes all fixed-wing turbine engine aircraft operations, and the piston aircraft group, which includes piston engine fixed-wing aircraft operations and helicopters. According to FAA, this cost allocation methodology is based on the assumption that high-performance users generally compete for the same air traffic control resources and their operations are more time-sensitive than piston aircraft operations, requiring more complex air traffic equipment and procedures. Piston aircraft operations, on the other hand, tend to be less time-sensitive and typically rely on less complex equipment. Differences in the speed and cruising altitudes of the two aircraft types also affect their en route costs. The current funding structure, with some modifications to the excise taxes and tax rates and changes in the levels of General Fund contributions, has successfully funded a growing FAA budget. Trust Fund revenues are projected to increase substantially at current excise tax rates. If, to fund the additional costs of NextGen or for other reasons, Congress chooses to increase spending on aviation beyond what can be paid for at current excise tax rates, it can obtain additional revenue through the current funding structure by increasing excise tax rates, the General Fund contribution, or both, although the nation's fiscal imbalance could make such an increase difficult. Nonetheless, because some factors that drive tax revenues, such as ticket prices, are not well linked to FAA's workload and costs, FAA has been concerned about the long-run revenue adequacy, equity, and efficiency of its funding. Some of the administration's proposed changes for funding FAA, such as establishing direct user charges for commercial aviation and substantially increasing fuel taxes for general aviation are intended to link FAA's revenues more closely with its costs. For other elements of FAA's budget, however, it is not possible to establish a direct link between revenues and costs. For example, because AIP expenditures are not the direct result of costs imposed by users of the NAS, the proposal to fund AIP through equal fuel taxes on all aircraft operators can best be evaluated on equity grounds. Better alignment of FAA's revenues and costs can address some of the concerns about the current funding system that derive from the lack of connection between some key drivers of current FAA revenues, such as ticket prices, and FAA's workload and costs. However, the effectiveness of the proposed funding structure in linking costs with revenues depends critically on how well FAA's new cost allocation method assigns costs to users and on how closely the proposed funding structure adheres to the principle of cost-based funding, and questions remain about both considerations. Furthermore, FAA's method for estimating the fuel tax rates needed to collect its intended level of fuel tax revenue may have underestimated the tax rates needed by not accounting for possible reductions in fuel consumption due to the higher tax rates. The implications of some of the other proposed changes, including one creating an advisory board that can make recommendations on fee setting and another authorizing limited authority for FAA to use debt financing, are uncertain. Congress has used the current funding structure--excise taxes plus a General Fund contribution--to fund FAA for many years. As the number of air travelers has grown, so have excise tax revenues. Even though revenues fell during the early years of this decade as the demand for air travel fell, they began to rise again in fiscal year 2004, and FAA estimates that if the current taxes remain in effect at their current rates, revenues will continue to increase. While retaining the basic structure for funding FAA, Congress has at times changed the mix of excise taxes and some of the tax rates. For example, when the taxes were most recently reauthorized in 1997, Congress added the passenger segment tax while reducing the passenger ticket tax rate from 10 percent to 7.5 percent. Congress has also appropriated varying amounts of General Fund revenues for FAA during the past 25 years, ranging from 0 to 59 percent of FAA's budget and averaging around 20 percent since fiscal year 1997. The fluctuation in the amount of the General Fund contribution occurs because the contribution is based on the incoming Trust Fund revenues that are available to fund the Operations account after revenues have been allocated to fund the F&E, AIP, RE&D accounts. Therefore, fluctuations in the Trust Fund revenues and FAA expenditures require different levels of General Fund contributions. As air traffic grows and FAA embarks on modernization through NextGen, Congress may appropriate additional funds to FAA to fund new investment and to maintain a safe and efficient airspace system, although there is considerable uncertainty about how much NextGen will cost. FAA estimates that NextGen will cost between $15 billion to $22 billion through 2025. However, funding NextGen does not mean that the current funding structure needs to be changed. According to projections prepared by the Congressional Budget Office (CBO), revenues obtained from the existing funding structure are projected to increase substantially. Assuming that the General Fund provides about 19 percent of FAA's budget, CBO estimates that through 2016 the Trust Fund can support about $19 billion in additional spending over the baseline FAA spending levels CBO has calculated for FAA (the 2006 funding level, growing with inflation) provided that most of that spending occurs after 2010. How far this money will go to fund modernization is subject to a number of uncertainties-- including the future cost of NextGen investments, the volume of air traffic, the future costs of operating the NAS, and the levels of future appropriations for AIP, all of which may influence funding for FAA. However, if the desired level of spending exceeded what was likely to be available from the Trust Fund at current tax rates, Congress could make further changes within the current structure that would provide FAA with additional revenue if Congress believed that larger FAA appropriations were appropriate--for example, if FAA experienced increased workload demands as a result of increased demand for air traffic services. Congress could raise more revenue from airspace system users for NAS modernization or for other purposes by raising the rates on one or more of the current excise taxes. Congress could also provide more General Fund revenues for FAA, although the nation's fiscal imbalance may make a larger contribution from this source difficult. Thus, it is necessary to look at factors other than a need for more revenues to justify a major change in FAA's funding structure. FAA has expressed concern that revenues from the current funding structure depend heavily on factors, such as ticket prices, that are not connected to FAA's workload and costs. According to FAA, under the current structure, increases in the agency's workload may not be accompanied by revenue increases because users are not directly charged for the costs that they impose on FAA for their use of the NAS. Revenues collected from excise taxes are primarily dependent on the price of tickets and the number of passengers on planes, while workload is driven by flight control and safety activities. This disconnect raises three key concerns about the current funding structure--its long-term revenue adequacy, equity, and efficiency. Moreover, these three concerns are supported by long-term industry trends and FAA forecasts of declines in inflation- adjusted air fares, the growing use of smaller aircraft, and FAA's 2007 cost allocation study. The administration has used these concerns as its rationale for proposing major changes in FAA's funding. Many of the proposed changes for funding FAA contained in the administration's reauthorization proposal are intended to address the concerns about revenue adequacy, equity, and efficiency by linking FAA's revenues more closely with its costs. The proposal calls for a combination of methods for funding FAA, which we previously reported might best address concerns with the current system by providing a better link between revenues and costs than any option used separately. For example, the proposal would eliminate all the excise taxes except the taxes on fuel and the tax on arriving and departing international passengers. The ATO, the largest part of FAA's budget, would then be funded by direct user charges on commercial aircraft--including air taxis, fractionally owned aircraft, and aircraft providing charter service--that use the NAS, fuel taxes paid by general aviation users of the NAS (both turbine and piston), and General Fund revenues to cover the costs of exempt aircraft such as military and other state aircraft and flight service stations. The proposal would also allow FAA to establish a fee for all aircraft using the nation's most congested airports. Based on the time of day or day of the week, the fee would be designed to increase efficient use of the NAS by discouraging peak-period traffic at congested airports and, thus, reducing delays. Under such a fee, cargo carriers could pay lower fees by operating at night than they would pay by operating at peak periods of the day, creating an incentive for some cargo carriers to switch daytime operations to nighttime. The fee could also create incentives for general aviation aircraft flying to and from metropolitan areas with congested airports to use other nearby airports instead. The shares of ATO costs to be recovered from commercial and general aviation aircraft, respectively, and the General Fund contribution to cover the costs of exempt aircraft would be based on the results of FAA's cost allocation study. In addition, the proposal would authorize FAA to impose fees to pay for costs related to certain aircraft certification and registration activities that it conducts. Basing cost recovery for ATO only on cost allocation is a policy choice. In many other countries, cost recovery is based in part on cost allocation and in part on other principles, such as ability to pay. For example, some countries charge a fee for en route services based on weight and distance; weight is included as a factor in charging formulas because many believe that it reflects an aircraft operator's ability to pay. Using additional principles for cost recovery could result in different distributions of the funding burden among user groups. For one large area of FAA's budget, AIP, it is not possible to establish a direct link between revenues and costs because AIP expenditures are not the direct result of costs imposed by users of the NAS. FAA distributes AIP grants on the basis of congressional priorities established in authorizations and appropriations. Accordingly, equity would appear to be the best criterion to use in evaluating the administration's proposal to fund AIP through a fuel tax of 13.6 cents per gallon on commercial and general aviation operators and a tax of $6.39 per passenger on the use of international travel facilities. According to an FAA official, the decision to establish equal tax rates for commercial and general aviation operators was made to achieve fairness and simplicity. One way to evaluate the fairness or equity of funding AIP in this way would be to compare the distribution of the funding burden among user groups with the distribution of the grants funded by AIP. With all aircraft being charged the same fuel tax rate, according to FAA forecasts for fiscal year 2009, commercial aircraft operators would pay about 88 percent of the fuel tax revenues collected primarily to fund AIP, while general aviation operators would pay 12 percent. However, under the current AIP program, about one-third of AIP grants would go to airports with no commercial service, and some additional grants would go to airports where general aviation traffic makes up a substantial share of the aircraft operations. Thus, under the administration's proposal, commercial aviation users would appear to be paying for a large share of the benefits that come from capital spending at general aviation airports. This result is no different from what happens today; commercial aviation users currently pay for a large share of these benefits, since the largest share of the Trust Fund comes from passenger ticket taxes. Some portion of these benefits may accrue to commercial aviation users if capital spending at general aviation airports keeps general aviation traffic from using congested commercial airports. However, most of the benefits from capital spending at general aviation airports would likely go to users of those airports or their surrounding communities--or to the general public to the extent a national system of airports that includes general aviation airports creates public benefits. In that case, funding those benefits by fuel taxes paid by commercial aircraft may raise equity issues. An alternative approach that would be consistent with a policy choice to charge general aviation users less than the cost of the benefits they receive from AIP grants would be to use General Fund revenues to fund part of AIP. A better alignment of FAA's revenues and costs can address revenue adequacy, equity and efficiency concerns, but the ability of the proposed funding structure to link revenues and costs to address these concerns depends critically on two things--first, the soundness of FAA's cost allocation system in allocating costs to users and, second, how closely the proposed funding structure adheres to the principle of cost-based funding. FAA's new cost allocation study was released at the end of January, so we and others have had only a short time to review it. However, we, as well as industry stakeholders, have raised a number of concerns about the study and its cost allocation methodology. For example, FAA divides NAS users into two groups: high-performance aircraft, such as jets and turboprop aircraft, and piston aircraft. According to FAA, dividing users this way creates two principal groups whose flights impose substantially different costs on FAA. High-performance aircraft which fly at higher altitudes and speeds, and normally use Instrument Flight Rules, are "controlled" through en route airspace and for landings and takeoffs by air traffic controllers. Therefore, they impose higher costs on FAA than piston aircraft which fly at lower altitudes and often use Visual Flight Rules, under which they are not "controlled" through en route airspace but can use air traffic control services for landings and takeoffs. However, FAA did not conduct a statistical cost analysis to determine whether high-performance aircraft of different types might impose sufficiently different costs on the system to warrant dividing NAS users into more than two groups. For example, differences in aircraft weight could affect terminal airspace costs even though they may not affect en route costs. Although there may be no effect of aircraft weight on en route costs, FAA officials told us that the administration's reauthorization proposal requests authority to set terminal airspace user fees based in part on weight because they believe that larger aircraft require greater separation, thus imposing greater terminal airspace costs. Under FAA's cost allocation methodology, fixed costs are assigned to the group that is the primary user of the air traffic control services that generate those costs. Accordingly, it might be more consistent to divide high-performance aircraft into subgroups before FAA allocated the fixed costs of air traffic control services used by aircraft in all groups to the group that is the primary user of that service. Creating only two principal groups resulted in the allocation of some portion of the fixed costs to general aviation jet aircraft, because the high- performance group, which FAA defines to include general aviation jet aircraft, is the primary user of services that are responsible for most fixed costs. If instead, for example, FAA had created three principal aircraft groups--piston, heavy high-performance, and light high-performance-- and if the heavy high-performance group was the primary user of services that are responsible for most fixed costs, then the fixed costs would have been allocated only to that group. The effect of this change in methodology would likely have been that general aviation turbine users would have been allocated a smaller share of total ATO costs and a lower fuel tax rate would have been needed to collect their share of FAA's revenues. Because a sound cost allocation methodology is central to the successful application of cost-based funding, more time may be needed for FAA to further analyze the differences among aircraft types that lead to differences in the costs they impose on the NAS. More time may also be needed for a fuller analysis and discussion of FAA's cost allocation methodology, after which, perhaps, a wider consensus might be reached on FAA's cost allocation methodology. At the request of this Committee, we are continuing to review FAA's cost allocation methodology. In addition to our concerns about the cost allocation methodology, we have identified some instances in which the reauthorization proposal does not strictly adhere to the principle of cost-based funding. For example, FAA has made what it terms a policy decision to not apply the congestion charge for using terminal airspace near large, busy airports to all aircraft that fly through that airspace. Aircraft flying near busy airports and using the same airspace but not taking off or landing at these airports would not be charged, even though such flights would use air traffic control services provided by the same approach control centers. FAA officials told us that they made this decision because the approach control centers would not exist if they were not serving traffic at the busy airports. In addition, they said, FAA wanted to create incentives for general aviation aircraft to avoid flying to or from the busy airports and to use other nearby airports instead. Although that rationale could provide a justification for allocating the fixed costs of such centers to users of the busy airports, allocating all of the variable costs to users at those airports is a deviation from a cost- based approach. While such policy decisions on pricing may be appropriate in some instances for various reasons, but they create deviations from the principle of cost-based funding that may limit the ability of the administration's proposal to address concerns about the disconnect between revenues and costs associated with the current funding structure. The proposed fuel tax rates, although much higher than current rates, may not yield the revenue that FAA expects to collect from fuel taxes. FAA estimated the tax rates necessary to collect from general aviation operators the share of ATO costs allocated to them and from both commercial and general aviation operators the revenue needed to fund the proposed level of $2.75 billion for AIP, EAS, and the portion of the RE&D account to be funded through fuel taxes (less the share paid by international passengers). FAA officials confirmed for us that in performing these estimates they did not take into account possible reductions in fuel purchases due to the increase in the tax rates. Although we do not know by how much such purchases would decline, conventional economic reasoning, supported by the opinions of industry stakeholders, suggests that some decline would take place. Therefore, the tax rate should be set taking into consideration effects on use and the resulting impact on revenue. FAA officials told us that they believe that these effects would be small because the increased tax burden is a small share of aircraft operating costs and therefore there was no need to take its impact into account. Representatives of general aviation, however, have said that the impact could be more substantial. Even if there is no change in fuel purchases due to higher tax rates, FAA's forecasts suggest that fuel tax revenues might be less than the proposed spending to be funded by those tax revenues. Furthermore, we observe that the administration's proposed spending for AIP is substantially below the levels at which Congress funded the program in recent years. If Congress were to adopt the proposed funding structure but fund AIP at the same level as this year, fuel tax rates would need to be raised above the proposed level to obtain enough revenue to fully fund AIP without resorting to alternative funding sources, such as the General Fund or drawing down the Trust Fund balance. The proposed creation of an advisory board raises questions about the influence that NAS users would have on fee setting and the impact that such a board would have on congressional oversight. According to the reauthorization proposal, the advisory board would be able to recommend user fee amounts to the FAA Administrator, who would have the final decision in setting fees. If the advisory board objected to the fee, the Administrator would be required to publish a written explanation in the Federal Register. Aviation stakeholders could appeal the fee to the Secretary of Transportation but there would be no judicial review of the Secretary's appeal decision. According to a recent report by the Congressional Research Service, the FAA Administrator would have substantial discretion in how much to use the advisory board's expertise. Congress would have no role in setting fees, whereas under the current system, Congress sets the tax rates. The combination of these elements raises the issue of how to ensure the appropriate level of congressional oversight. With a user fee, Congress would set the total amount to collect and spend from the fees through the appropriations process. The authorization of limited borrowing authority (up to $5 billion) for FAA in the administration's proposal seems unlikely to have a major effect on FAA's ability to pay for capital investment associated with moving to NextGen, because the payback period is relatively short. With a maximum payback period of 5 years, the advantage of matching the time period for paying for a capital investment with the time period in which the benefits of that investment are realized is unlikely to be achieved. As a result, the advantage of this type of borrowing compared to appropriations also funded by Treasury debt is less clear. In either case, user fee collections could offset the borrowing. However, it is possible that having FAA borrow from the Treasury with a relatively short time period for repayment could serve as a way to tighten and make more explicit the link between the borrowing and the fees that are the source of repayment-- and could ensure that the fees were set at a level sufficient to provide the needed funds. Limiting FAA's authority to borrow from the Treasury and collecting revenue from user fees, as proposed, is preferable to giving FAA direct access to capital markets or repaying debt with appropriations or new borrowing. The Treasury can borrow at lower interest rates than FAA could achieve by going to the capital markets because Treasury securities are considered risk-free, since they are backed by the federal government. We have recommended that only those agencies that would be able to repay their borrowing through revenue collections be granted authority to borrow. In addition, we have reported that debt financing raises issues about borrowing costs that are particularly important in light of the federal government's long-term structural fiscal imbalance. Mandatory federal commitments to health and retirement programs will consume an ever- increasing share of the nation's gross domestic product and federal budgetary resources. Accordingly, any program or policy change that may increase costs requires sound justification and careful consideration before adoption. The reauthorization proposal to align FAA's budget accounts with FAA's lines of business has advantages and disadvantages. Such a restructuring is consistent with FAA's emphasis on aligning revenues and costs and could allow FAA to more specifically distinguish those funding options that provide a better links between costs and revenues. For example, an ATO account dedicated to the operation, maintenance, and upgrade of the NAS could better enable the agency to charge for direct usage of the NAS. In addition, such a system could show the costs attributable to each line of business, thereby supporting the agency's internal financial management. However, some FAA activities may not be clearly divisible into discrete categories. For example, one new account--the Safety and Operations account--includes safety-related activities. Nonetheless, there could be some ambiguity in how safety activities are defined and in how their costs should be allocated between aviation users which benefit directly from a safe air traffic control system and the public which receives general safety benefits. Linking the General Fund contribution to FAA's budget, as the administration is proposing, would explicitly recognize that users of the system are not the only beneficiaries of it. Such an approach allows for a "bottom up" calculation of the General Fund contribution that is based on the different public benefits that FAA provides, such as safety and use of the NAS by federal agencies. This approach is different from the current one, which bases the General Fund contribution on how much money is left in the Trust Fund to fund the Operations account after Trust Fund revenues for that particular year have been allocated to fund the F&E, AIP, and RE&D accounts. An approach that links a General Fund contribution to public benefits is consistent with the principle of public finance that public benefits should come from the General Fund and not from user contributions. This should not, however, be viewed as a precise determination. Some aviation activities, such as safety, benefit both users and the nonuser public. Others, such as a national airport system that includes small airports that receive federal grants, may be seen as a benefit solely to the users of those airports, to their communities, or to the broader public. In addition, such a change in the method of determining the General Fund contribution may result in an increase or a decrease in that contribution, which would have implications for how aviation activities are funded. The administration has introduced a complex proposal for funding FAA, and we believe that it deserves serious and thoughtful consideration. Adopting this proposal is not necessary to provide more money to FAA if Congress thinks that additional spending on aviation is needed to address air traffic increases and new investment demands, including NextGen, because additional funding can be provided within the current structure. However, given the current federal fiscal imbalance, appropriating additional funds to aviation may be difficult. Furthermore, the proposal may address some of the concerns that FAA and other stakeholders have raised with the current funding structure, such as equity, but only if the cost allocation from which the cost-based funding is derived is sound. FAA's cost allocation methodology is new and has raised issues, suggesting that further analysis and more time may be needed to reach a consensus as to whether it is sufficiently sound to support a cost-based funding structure for FAA. In the meantime, the taxes that currently provide most of the revenue for FAA are scheduled to expire at the end of the current fiscal year. Given the relatively low uncommitted balance in the Trust Fund, a lapse in tax revenues could affect the funding of most FAA activities. Thus, timely reauthorization of the current tax revenues to avoid a tax lapse is critical even if Congress chooses to continue its consideration of the administration's proposal or other alternatives for funding FAA beyond this fiscal year. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the subcommittee might have. For further information about this testimony, please contact Gerald L. Dillingham at (202) 512-2834. Other key contributors to this testimony include Jay Cherlow, Ed Laughlin, Maureen Luna-Long, Maren McAvoy, Jennifer Kim, and Elizabeth Eisenstadt. 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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Recently, the administration submitted a proposal for reauthorizing the Federal Aviation Administration (FAA) and the excise taxes that fund most of its budget. FAA's current authorization expires in 6 months. The proposal calls for major changes to FAA's funding and budget structure that are intended to address concerns about the long-term revenue adequacy, equity, and efficiency of FAA's current funding structure and to provide a more stable, reliable basis for funding a new air traffic control system that FAA is developing (at an estimated cost of $15 billion to 22 billion through 2025) to meet forecasted increases in air travel demand. The proposal would introduce cost-based charges for commercial users of air traffic control services, eliminate many current taxes, substantially raise fuel taxes for general aviation users, charge commercial and general aviation users a fuel tax to pay primarily for airport capital improvements, modify FAA's budget accounts to align with specific FAA activities, and link the portion of FAA's budget that comes from the Treasury's General Fund with public benefits FAA provides. This statement offers GAO's observations on the proposed changes in FAA's (1) funding and (2) budget structure and is based on GAO's analysis of FAA's proposal and a recent GAO report on FAA funding options. Funding Structure: The current funding structure has supported FAA as FAA's budget has grown, and it can continue to do so to fund planned modernization. Excise tax revenues are forecasted to increase if the current taxes are reauthorized without change and thus could support additional spending. If necessary, Congress can obtain more revenue by increasing the excise tax rates or the General Fund contribution to FAA's budget, although the nation's fiscal imbalance could make such an increase difficult. FAA is concerned because revenues from the current funding structure depend primarily on ticket prices and passenger numbers, which are not well linked to FAA's workload and costs. The proposed new funding structure would link revenues more closely with costs to ensure that revenues rise with increases in FAA's air traffic control and safety activities. According to FAA, cost-based user charges would also be more equitable and could create incentives for more efficient use of the system by aircraft operators. How well FAA's proposed funding structure, if enacted, would achieve these goals is uncertain because it depends on two unknowns--the soundness of a new FAA cost allocation methodology and the extent to which the proposed structure links revenues to costs. Also uncertain are the adequacy of FAA's proposed fuel tax rate to collect anticipated revenues, the implications of a proposed advisory board, and the impact of a proposal to give FAA limited debt-financing authority. Furthermore, GAO notes, user charges would reduce Congress's role in setting revenues. Budget Structure: Modifying FAA's budget accounts is consistent with FAA's emphasis on aligning revenues and costs, but may present implementation issues, in that some FAA activities may be difficult to categorize. More specifically, the proposed restructuring could allow FAA to better identify funding options that link revenues and costs and may improve transparency by showing how much is being spent on specific FAA activities. However, some activities, such as those related to safety, may not lend themselves to placement in discrete categories. Linking the General Fund contribution to public benefits is appropriate, but since some activities may provide both public and private benefits, judgment rather than a precise calculation may determine the contribution. Concluding Observations: The administration has introduced a complex proposal for funding FAA that GAO believes deserves serious and thoughtful consideration. While not necessary to provide more money for FAA, the proposed structure may address some of the concerns raised by the current structure if its cost allocation is sound. Because FAA's cost allocation model is new, further analysis and more time may be needed to determine whether it can adequately support a cost-based funding structure for FAA. Timely reauthorization of funding for FAA for at least the next year is, however, critical to prevent a lapse in funding for most FAA activities, regardless of the action taken on the proposed changes.
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Tribal lands vary dramatically in size, demographics, and location. They range in size from the Navajo Nation, which consists of about 24,000 square miles, to some tribal land areas in California comprising less than 1 square mile. Over 176,000 American Indians live on the Navajo reservation, while other tribal lands have fewer than 50 Indian residents. Some Indian reservations have a mixture of Indian and non-Indian residents. In addition, most tribal lands are rural or remote, although some are near metropolitan areas. The federal government has consistently recognized Indian tribes as distinct, independent political communities with inherent powers of a limited sovereignty which has never been extinguished. To help manage tribal affairs, tribes have formed governments or subsidiaries of tribal governments including schools, housing, health, and other types of corporations. The United States has a trust responsibility to recognized Indian tribes and maintains a government-to-government relationship with those tribes. As of October 2010, there were 565 federally recognized tribes--340 in the continental United States and 225 in Alaska. According to tribal officials and government agencies, conditions on and around tribal lands--including the lack of technology infrastructure such as telecommunications lines--generally make successful economic development more difficult. In addition, a 1999 Economic Development Administration (EDA) study that assessed the state of infrastructure in American Indian communities found that these communities also had other disadvantages that made successful business development more difficult. This study found that the high cost and small markets associated with investment in Indian communities continued to deter widespread private sector involvement. To help address the needs of Indian tribes, various federal agencies provide assistance, including economic development assistance. The Bureau of Indian Affairs (BIA) in the Department of the Interior is charged with the responsibility of implementing federal Indian policy and administering the federal trust responsibility for about 2 million American Indians and Alaska Natives. BIA assists tribes in various ways, including providing for social services, developing and maintaining infrastructure, and providing education services. BIA also attempts to help tribes develop economically by, for example, providing resources to administer tribal revolving loan programs and guaranteed loan programs to improve access to capital in tribal communities. In addition to the support provided by BIA, other agencies with significant programs for tribes include the Department of Health and Human Services, which provides funding for the Head Start Program and the Indian Health Service; the Department of Housing and Urban Development, which provides support for community development and housing-related projects; and the Department of Agriculture, which provides support for services pertaining to food distribution, nutrition programs, and rural economic development. Our prior work has highlighted five broad categories of unique issues that have the potential to create uncertainty for tribes or, in some cases, private companies wishing to pursue economic activities on Indian reservations. Some of the issues that we have identified during our past work include (1) accruing land in trust for tribes and individual tribal members, (2) tribal environmental standards, (3) Indian tax provisions, (4) obtaining rights-of-way, and (5) certain legal issues that arise from the unique legal status of tribes. In addition to these five issues there may be others, such as access to financing, which may also hinder economic activity on Indian reservations. The five broad categories should only be considered as illustrative of some of the unique circumstances that exist in Indian country, which tribes or other business entities will need to take into account when they consider undertaking economic activities on tribal lands. Having a land base is essential for many tribal economic development activities such as agriculture, grazing, timber, energy development, and gaming. Since the early days of colonization, Indian lands have diminished significantly, in large part because of federal policy. By 1886, Indian lands had been reduced to about 140 million acres, largely on reservations west of the Mississippi River. Federal policy encouraging assimilation in the late 1800s and early 1900s further reduced Indian lands by two-thirds, to about 49 million acres by 1934. In 1934, however, the enactment of the Indian Reorganization Act changed the government's Indian policy to encourage tribal self-governance. Section 5 of the act provided the Secretary of the Interior with discretionary authority to take land in trust on behalf of Indian tribes or their members. Trust status means that the federal government holds title to the land in trust for tribes or individual Indians. Once land is taken in trust it is no longer subject to state and local property taxes and zoning ordinances. In 1980, Interior established a regulatory process intended to provide a uniform approach for taking land in trust. Under the regulations, tribes or individual Indians who purchase or own property on which they pay property taxes can submit a written request to the Secretary of the Interior to have the land taken in trust; if approved, the ownership status of the property would be converted from taxable status to nontaxable Indian trust status. Some state and local governments support the federal government's taking additional land in trust for tribes or individual Indians, while others strongly oppose it because of concerns about the impacts on their tax base and jurisdictional control. Since 1934, the total acreage held in trust by the federal government for the benefit of tribes and their members has increased from about 49 million to about 54 million acres. We reported in July 2006 that BIA generally followed its regulations for processing land in trust applications from tribes and individual Indians to take land into trust, but had no deadlines for making decisions on these applications. BIA generally responded to our recommendations to improve the processing of such applications, but this issue continues to create uncertainty in Indian country, in part, because of a February 24, 2009, Supreme Court decision and ongoing litigation. The Supreme Court held that the Indian Reorganization Act only authorizes the Secretary of the Interior to take land into trust for a tribe or its members if that tribe was under federal jurisdiction when the law was enacted in 1934. The court did not define what constituted being under federal jurisdiction but did find that a particular tribe, which was not federally recognized until 1983, was not under federal jurisdiction in 1934. It is not clear how many tribes or pending land in trust applications will be affected by this decision, but the decision raises a question about the Secretary's authority to take land in trust for the 50 tribes that have been newly recognized since 1960 and their members. The Secretary's decisions to take land in trust for two of these tribes--the Match-e-be-nash-she-wish Band of Potawatomi Indians of Michigan and the Cowlitz Indian tribe of Washington--have been challenged in court. Having or securing the land does not lead to economic development if that land sits idle. In the past we have reported on concerns about idle Indian lands and BIA's process for leasing Indian lands, but we have not done any recent work on these issues. The Clean Water Act, Safe Drinking Water Act, and Clean Air Act authorize the Environmental Protection Agency (EPA) to treat Indian tribes in the same manner as it does states, referred to as TAS (treated as states), for the purposes of implementing these laws on tribal lands. On the one hand, tribes want to be treated as states and assume program responsibilities to protect their environmental resources because they are sovereign governments and have specific knowledge of their environmental needs. Tribes also generally believe that TAS status and program authority are important steps in addressing the potential impacts of economic development affecting their land. On the other hand, in some cases, states are concerned that tribes with program authority may impose standards that are more stringent than the state's, resulting in a patchwork of standards within the state and potentially hindering the state's economic development plans. In October 2005, we reported that since 1986, when Congress amended the first of the three environmental laws to allow TAS status for tribes, a number of disagreements between tribes, states, and municipalities had arisen, over land boundaries, environmental standards, and other issues. The disagreements had been addressed in various ways, including litigation, collaborative efforts, and changes to federal laws. For example, in City of Albuquerque v. Browner, the city challenged EPA's approval of the nearby Pueblo of Isleta tribe's water quality standards, which are more stringent than those of New Mexico. EPA's approval was upheld. In other disagreements, some tribes and states have addressed the issues more collaboratively. For example, the Navajo Nation and the Arizona Department of Environmental Quality entered into a cooperative agreement that, among other things, recognizes the jurisdiction of the Navajo Nation within its reservation and establishes a plan to share the cost of pilot projects. Regarding the use of federal legislation to address disagreements, a federal statute enacted in August 2005, requires Indian tribes in Oklahoma to enter into a cooperative agreement with the state before EPA can approve a tribe's TAS request. At the time of our October 2005 report, the Pawnee Nation was the only Oklahoma tribe that had been awarded TAS status to set its own water quality standards, and we have not conducted any more recent work on this issue. The tax code has also been used to promote economic activity in Indian country. We have reported on tax provisions regarding (1) the uncertainties that tribes faced regarding the types of activities that they could finance with tax-exempt bonds and (2) the impact of accelerated depreciation provisions. In September 2006, we reported on Indian tribal governments' use of tax- exempt bonds under section 7871(c) of the Internal Revenue Code. Section 7871(c), which was originally enacted in 1983, generally limits the use of tax-exempt bonds by Indian tribal governments to the financing of certain activities that constitute "essential government functions." In 1987, section 7871(e) was added to the code to limit the essential governmental functions standard further to provide that an essential governmental function does not include any function which is not customarily performed by state and local governments with general taxing powers. To date the Internal Revenue Service has not issued regulations defining essential government function. The lack of a definition has created uncertainty among tribes regarding the types of activities that they can finance using tax-exempt bonds. In addition, this custom-based essential governmental function standard has proven to be a difficult administrative standard and has led to audit disputes, based on difficulties in determining customs, the evolving nature of the functions customarily performed by state and local governments, and increasing involvement of state and local governments in quasi-commercial activities. In trying to determine what the customary practices were of state and local governments that tribes should be held accountable to, we reported that state and local governments had provided financial support for a variety of facilities, including rental housing, road transportation, parking facilities, park and recreation facilities, golf facilities, convention centers, hotels, and gaming support facilities. Section 1402 of the American Recovery and Reinvestment Act of 2009 added a $2 billion bond authorization for a new temporary category of tax- exempt bonds with lower borrowing costs for Indian tribal governments known as "Tribal Economic Development Bonds" under section 7871(f) of the Internal Revenue Code to promote economic development on Indian lands. In general, this new authority provides tribal governments with greater flexibility to use tax-exempt bonds to finance economic development projects than is allowable under the existing essential governmental function standard of section 7871(c). The Internal Revenue Service allocated the $2 billion of bond issuance authority provided by section 1402 to 134 tribal governments in two rounds. Furthermore, the act required the Secretary of the Treasury to study the effect of section 1402 and report to Congress on the results of the study, including the Secretary's recommendation regarding the provision. According to the Treasury Department, the House Ways and Means Committee and the Senate Finance Committee indicated that, in particular, Treasury should study whether to repeal on a permanent basis the existing more restrictive essential governmental function standard for tax-exempt governmental bond financing by Indian tribal governments under section 7871(c). The act required that the study be completed no later than 1 year after enactment, which would have made the deadline February 17, 2010. The Treasury Department published a notice in the Federal Register in July 2010 seeking comments from tribal governments regarding the tribal economic development bond to assist the department in developing recommendations for the required study, but, to our knowledge, the department has not yet issued the report to Congress. There is continuing uncertainty in this area because it is unknown what the Treasury Department may recommend regarding changes to section 7871(c) and ultimately what changes, if any, Congress may adopt. A second tax measure intended to promote economic activity in Indian country is the Indian reservation depreciation provision, enacted in 1993. The provision acts as an incentive for investment on Indian reservations because it permits taxpayers to accelerate their depreciation for certain property used by businesses on Indian reservations. The provision's special depreciation deduction schedule permits eligible taxpayers to take a larger and earlier deduction for depreciation from their business incomes than they otherwise would be allowed, thereby reducing any tax liability. Reducing tax liability earlier is an incentive for economic development because having a lower tax payment today is worth more to the taxpayer than having a lower tax payment in the future. However, in June 2008, we reported that there were insufficient data to identify users of the provision and assess whether the provision had increased economic development on Indian reservations. Securing rights-of-way across Indian lands is an important component of providing Indian lands with the critical infrastructure needed to support economic activity. We have reported on the uncertainties that telecommunication service providers and a nonprofit rural electric cooperative have faced in trying to negotiate rights-of-way involving Indian lands. In January 2006, we reported that according to several telecommunications service providers and tribal officials, obtaining a right-of-way through Indian lands is a time-consuming and expensive process that can impede service providers' deployment of telecommunications infrastructure. The right-of-way process on Indian lands is more complex than the right-of-way process for non-Indian lands because BIA must approve the application for a right-of-way across Indian lands. BIA grants or approves actions affecting title on Indian lands, so all service providers installing telecommunications infrastructure on Indian lands must work with BIA or its contractor (a realty service provider) to obtain a right-of-way through Indian lands. To fulfill the requirements of federal regulations for rights-of-way over Indian lands and obtain BIA approval, service providers are required to take multiple steps and coordinate with several entities during the application process. These steps must be taken to obtain a right-of-way over individual Indian allotments as well as tribal lands. Several of the steps involve the landowner, which could be an individual landowner, multiple landowners, or the tribe, depending on the status of the land. Specifically, the right-of- way process requires (1) written consent by the landowner to survey the land; (2) an appraisal of the land needed for the right-of-way; (3) negotiations with the landowner to discuss settlement terms; (4) written approval by the landowner for the right-of-way; and (5) BIA approval of the right-of-way application. One telecommunication service provider told us that an individual Indian allotment of land can have over 200 owners, and federal regulations require the service provider to gain approval from a majority of them. The service provider stated that the time and cost of this process is compounded by the fact that a telecommunications service line often crosses multiple allotments. In addition, if the service provider cannot obtain consent for the right-of-way from the majority of landowners, the provider is forced to install lines that go around the allotment, which is also expensive. Rights-of-way can also be necessary to deliver energy to consumers. In September 2004, we reported that the Copper Valley Electric Association, a nonprofit rural electric cooperative, had been unable to reach agreements with several individual Alaska Natives for rights-of-way across their land. In 1906, the Alaska Native Allotment Act authorized the Secretary of the Interior to allot individual Alaska Natives a homestead of up to 160 acres. We found 14 cases where conflict exists regarding Copper Valley's rights-of-way within Native allotments. Resolution to a number of these conflicts had been intermittently pursued since the mid- 1990s, but at the time of our report, only a few cases had been resolved using existing remedies. Copper Valley had three remedies to resolve these conflicts: (1) negotiating rights-of-way with Native allottees in conjunction with BIA; (2) relocating its electric lines outside of the allotment; or (3) exercising the power of eminent domain, also known as condemnation, to acquire the land. We reported that Copper Valley had ceased trying to resolve these conflicts because it maintains that the existing remedies are too costly, impractical, and/or potentially damaging to relationships with the community. More importantly, Copper Valley officials told us that on principle they should not have to bear the cost of resolving conflicts that they believe the federal government had caused. Section 1813 of the Energy Policy Act of 2005 required the Secretaries of Energy and of the Interior to conduct a study of issues regarding energy rights-of-ways on tribal land and issue a report to Congress on the findings, including recommending appropriate standards and procedures for determining fair and appropriate compensation to Indian tribes for granting, expanding and renewing rights-of-way. Issued in May 2007, the study focused on rights-of-way for electric transmission lines and natural gas and oil pipelines associated with interstate transit and local distribution. The study recommended that valuation of rights-of-way continue to be based on terms negotiated between the parties and that if negotiations failed to produce an agreement that has a significant regional or national effect on the supply, price, or reliability of energy resources, Congress should consider resolving such a situation through specific legislation rather than making broader changes that would affect tribal sovereignty or self-determination generally. The unique legal status of tribes has resulted in a complex set of rules that may affect economic development efforts. As we reported earlier this year, as a general principle, the federal government recognizes Indian tribes as "distinct, independent political communities" with inherent powers of self- government. Therefore, Indian tribes have sovereign immunity as well as plenary and exclusive power over their members and territory subject only to the limitations imposed by federal law. However, sovereign immunity may influence a private company's decision to contract with an Indian tribe and the limitations imposed by federal law on Indian tribes' civil jurisdiction over non-Indians on Indian reservations may create uncertainties regarding where lawsuits arising out of those contracts can be brought. Like the federal and state governments, Indian tribes are immune from lawsuits unless they have waived their sovereign immunity in a clear and unequivocal manner or a federal treaty or law has expressly abrogated or limited tribal sovereign immunity. For example, the Indian Tribal Economic Development and Contracts Encouragement Act of 2000 requires the Secretary of the Interior to approve any agreement or contract with an Indian tribe that encumbers Indian lands for 7 or more years; however, it prohibits the Secretary from approving the agreement or contract unless it provides remedies for breaching the agreement or contract, references a tribal law or court ruling disclosing the tribe's right to assert sovereign immunity, or includes an express waiver of sovereign immunity. If the tribe does not waive its sovereign immunity in the agreement or contract, private companies might be hesitant to undertake the work because they will not be able to sue the tribe if any disputes arise. In addition to waiving sovereign immunity in agreements or contracts on a case-by-case basis, some tribes have formed separate entities to conduct business that are not immune from lawsuits. The Supreme Court has ruled that, as a general proposition, the inherent sovereign powers of an Indian tribe do not extend to the activities of non- tribal members. However, the Court has also recognized two exceptions to this general proposition: (1) tribes may regulate the activities of nonmembers who enter into consensual relationships with the tribe or its members through commercial dealing, contracts, leases, or other arrangements and (2) tribes may exercise civil authority over the conduct of non-Indians on fee lands within the reservation when that conduct threatens or has some direct effect on the political integrity, economic security, or the health or welfare of the tribe. In 2008, the Supreme Court ruled that a tribal court did not have jurisdiction to adjudicate a discrimination claim against a non-Indian bank brought by a company owned by tribal members because neither of the exceptions applied. The court's opinion focuses on the tribe's authority to regulate the bank's sale of fee land it owned within the reservation rather than addressing whether the tribal court had authority to hear the discriminatory lending claim under the consensual relationship exception. However, some private companies believe that this decision may not eliminate all of the uncertainty as to the nature and extent of tribal court jurisdiction that makes off-reservation businesses reluctant to trade on Indian reservations or with tribal members who live on reservations. For example, the brief filed by a railroad association asked the court to adopt a brightline rule that tribal courts may not exercise jurisdiction over claims against nonmembers absent clear and unequivocal consent to tribal court jurisdiction. The association argued that such a rule would ensure that litigation against nontribal members will be addressed by a forum that the nonmember has agreed affords acceptable law, procedure, and fundamental safeguards of process and fairness. In contrast to the unique issues that can cause uncertainty or pose challenges to economic activity in Indian country, tribes can take advantage of special provisions for gaming and small business contracting. Indian gaming, a relatively new phenomenon, started in the late 1970s when a number of Indian tribes began to establish bingo operations as a supplemental means of funding tribal operations. In 1987, the U. S. Supreme Court ruled that state regulation of tribal gaming would impermissibly infringe on tribal governments, thereby barring state regulation of tribal gaming in states which did not prohibit all forms of gaming. In response, the Indian Gaming Regulatory Act of 1988 was enacted, which established a regulatory framework to govern Indian gaming operations. In section 2(4) of the act, Congress found that a principle goal of federal Indian policy is to promote tribal economic development, tribal self-sufficiency, and strong tribal government. To that end, the act generally requires that the net revenues from tribal gaming operations be used to (1) fund tribal government operations or programs, (2) provide for the general welfare of the Indian tribe and its members, (3) promote tribal economic development, (4) donate to charitable organizations, or (5) help fund operations of local government agencies. A tribe may distribute its net revenues directly to tribal members, provided that the tribe has a revenue allocation plan approved by BIA and meets certain other conditions. According to the final report of the National Gambling Impact Study Commission, gambling revenues have proven to be a critical source of funding for many tribal governments, providing much needed improvements in the health, education, and welfare of Indians living on reservations across the United States. The National Indian Gaming Commission reports that for 2009 233 tribes operating 419 gaming operations generated $26.5 billion in revenue (233 tribes represents about 40 percent of the 565 federally recognized tribes), the top 21 operations (or about 5 percent of all the operations) generated 38.7 percent of all the revenues, and the top 71 operations (or about 17 percent of all the operations) generated 69.5 percent of all the revenues. In addition, in 1986, a law was enacted that allowed Alaska Native corporation (ANC)-owned businesses to participate in the Small Business Administration's (SBA) 8(a) program--one of the federal government's primary means for developing small businesses owned by socially and economically disadvantaged individuals. This program allows the government to award contracts to participating small businesses without competition below certain dollar thresholds. Since 1986, special procurement advantages have been extended to ANC firms beyond those afforded to other 8(a) businesses, such as the ability to win sole-source contracts for any dollar amount. In April 2006, we reported on the use of special procurement advantages by ANCs, and found that 8(a) obligations to firms owned by ANCs increased from $265 million in fiscal year 2000 to $1.1 billion in 2004. In fiscal year 2004, obligations to ANC firms represented 13 percent of total 8(a) dollars. Sole-source awards represented about 77 percent of 8(a) ANC obligations for the six procuring agencies that accounted for the vast majority of total ANC obligations over the 5-year period. ANCs use the 8(a) program to generate revenue with the goal of providing benefits to their shareholders, but the ANCs we reviewed did not track the benefits provided to their shareholders specifically generated from 8(a) activity. Thus, an explicit link between the revenues generated from the 8(a) program and benefits provided to shareholders is not documented. Benefits vary among corporations, but include dividend payments, scholarships, internships, burial assistance, land gifting or leasing, shareholder hire, cultural programs, and support of the subsistence lifestyle. The special procurement advantages for ANCs also generally apply to tribes and Native Hawaiian organizations (NHO). To obtain more information on the benefits these entities receive from participation in the 8(a) program, SBA recently promulgated regulations that require each 8(a) program participant owned by an ANC, tribe, or NHO to submit information showing how the ANC, tribe, or NHO has provided benefits to tribal or Native communities or tribal or Native members due to its participation in the 8(a) program. The data submitted should include information relating to funding cultural programs, employment assistance, jobs, scholarships, internships, subsistence activities, and other services provided by the ANC, tribe, or NHO to the affected community. We have ongoing work looking at the use of these special procurement advantages by ANCs, tribes, and NHOs. Chairman Lankford, Ranking Member Connolly, 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 testimony, please contact Anu K. Mittal 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. Jeffery D. Malcolm, Assistant Director; Jeanette Soares, and Joe Thompson also made key contributions to this statement. Department of the Interior: Major Management Challenges. GAO-11-424T. Washington, D.C.: March 1, 2011. Indian Country Criminal Justice: Departments of the Interior and Justice Should Strengthen Coordination to Support Tribal Courts. GAO-11-252. Washington, D.C.: February 14, 2011. Tax Expenditures: Available Data Are Insufficient to Determine the Use and Impact of Indian Reservation Depreciation. GAO-08-731. Washington, D.C.: June 26, 2008. Federal Tax Policy: Information on Selected Capital Facilities Related to the Essential Governmental Function Test. GAO-06-1082. Washington, D.C.: September 13, 2006. Indian Issues: BIA's Efforts to Impose Time Frames and Collect Better Data Should Improve the Processing of Land in Trust Applications. GAO-06-781. Washington, D.C.: July 28, 2006. Contract Management: Increased Use of Alaska Native Corporations' Special 8(a) Provisions Calls for Tailored Oversight. GAO-06-399. Washington, D.C.: April 27, 2006. Indian Irrigation Projects: Numerous Issues Need to Be Addressed to Improve Project Management and Financial Sustainability. GAO-06-314. Washington, D.C.: February 24, 2006. Telecommunications: Challenges to Assessing and Improving Telecommunications For Native Americans on Tribal Lands. GAO-06-189. Washington, D.C.: January 11, 2006. Indian Tribes: EPA Should Reduce the Review Time for Tribal Requests to Manage Environmental Programs. GAO-06-95. Washington, D.C.: October 31, 2005. Indian Economic Development: Relationship to EDA Grants and Self- determination Contracting Is Mixed. GAO-04-847. Washington, D.C.: September 8, 2004. Alaska Native Allotments: Conflicts with Utility Rights-of-way Have Not Been Resolved through Existing Remedies. GAO-04-923. Washington, D.C.: September 7, 2004. Welfare Reform: Tribal TANF Allows Flexibility to Tailor Programs, but Conditions on Reservations Make it Difficult to Move Recipients into Jobs. GAO-02-768. Washington, D.C.: July 5, 2002. Economic Development: Federal Assistance Programs for American Indians and Alaska Natives. GAO-02-193. Washington, D.C.: December 21, 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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Indian tribes are among the most economically distressed groups in the United States. In 2008, the U.S. Census Bureau reported that the poverty rate among American Indian and Alaska Natives was almost twice as high as the population as a whole--27 percent compared with 15 percent. Residents of tribal lands often lack basic infrastructure, such as water and sewer systems, and sufficient technology infrastructure. Without such infrastructure, tribal communities often find it difficult to compete successfully in the economic mainstream. This testimony statement summarizes GAO's observations on (1) five broad categories of unique issues that may create uncertainty and therefore affect economic activity in Indian country and (2) tribes' use of special gaming and small business contracting provisions. It is based on prior GAO reports. GAO's previous work has identified five broad categories of unique issues that may create uncertainty for tribes or, in some cases, private companies wishing to pursue economic activities on Indian reservations. Accruing land in trust. Having a land base is essential for tribal economic development activities such as agriculture, energy development, and gaming. However, a February 2009 Supreme Court decision has raised uncertainty about the process for taking land in trust for tribes and their members. Tribal environmental standards. The Clean Water Act, Safe Drinking Water Act, and Clean Air Act authorize the Environmental Protection Agency to treat Indian tribes in the same manner as states. In some cases, however, states are concerned that tribes with this authority may impose standards that are more stringent than the state standards, which could result in a patchwork of standards within the state and potentially hinder economic activity. Indian tax provisions. Tribes face uncertainties regarding the types of activities that they can finance with tax-exempt bonds. Also, in 2008, GAO reported that there were insufficient data to (1) identify the users of a tax provision that allows for accelerated depreciation of certain property used by businesses on Indian reservations and (2) assess whether the provision had increased economic development on Indian reservations. Obtaining rights-of-way. Securing rights-of-way across Indian land is important in providing Indian lands with the infrastructure needed to support economic activity. In 2006, GAO reported that obtaining rights-of-way through Indian lands was a time-consuming and expensive process. Legal status of tribes. The unique legal status of tribes has resulted in a complex set of rules that may affect economic activities. For example, Indian tribes have sovereign immunity, which can influence a business's decision to contract with a tribe. Also, the limitations imposed by federal law on Indian tribes' civil jurisdiction over non-Indians on Indian reservations can create uncertainties over where lawsuits arising out of contracts with tribes can be brought. In contrast to these unique issues that may pose challenges to economic activity in Indian country, some Indian tribes have taken advantage of special provisions for gaming and small business contracting. The National Indian Gaming Commission reports that tribal gaming operations generated $26.5 billion in revenue for 2009. However, not all tribes have gaming operations and the majority of the revenue is generated by a fraction of the operations. Similarly, Alaska Native Corporations (ANC) have been granted special procurement advantages. In 2006, GAO reported that obligations to firms owned by ANCs that participated in the Small Business Administration's 8(a) program increased from $265 million in fiscal year 2000 to $1.1 billion in 2004. We have ongoing work looking at the use of these special procurement advantages. This testimony statement contains no new recommendations.
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Consolidation loans differ from other loans in the FFELP and FDLP programs in that they enable borrowers who have multiple loans-- possibly from different lenders, different guarantors, and even from different loan programs--to combine their loans into a single loan and make one monthly payment. By obtaining a consolidation loan, borrowers can lower their monthly payments by extending the repayment period longer than the maximum 10 years generally available on the underlying loans. Maximum repayment periods allowed vary by the amount of the consolidation loan (see table 1). Consolidation loans also provide borrowers with the opportunity to lock in a fixed interest rate on their student loans, based on the weighted average of the interest rates in effect on the loans being consolidated rounded up to the nearest one-eighth of 1 percent, capped at 8.25 percent. Borrowers can qualify for consolidation loans regardless of financial need. Loans eligible for inclusion in a consolidation loan must be comprised of at least one eligible FFELP or FDLP loan, including subsidized and unsubsidized Stafford loans, PLUS loans, and, in some instances, consolidation loans. Both subsidized and unsubsidized Stafford loans, and PLUS loans are variable rate loans. Other types of federal student loans made outside of FFELP and FDLP, which may carry a variable or fixed borrower interest rate, are also eligible for inclusion in a consolidation loan, including Perkins loans, Health Professions Student loans, Nursing Student Loans, and Health Education Assistance loans (HEAL). The Federal Credit Reform Act (FCRA) of 1990 helps define federal costs associated with consolidation loans and was enacted to require agencies, including Education, to more accurately measure federal loan program costs. Under FCRA, Education is required to estimate the long-term cost to the government of a direct loan or a loan guarantee--generally referred to as the subsidy cost. Subsidy cost estimates are calculated based on the present value of estimated net cash flows to and from the government that result from providing loans to borrowers. For FFELP consolidation loans, cash flows include, for example, fees paid by lenders to the government and a special allowance payment by the government to lenders to provide them a guaranteed rate of return on the student loans they make. For FDLP consolidation loans, cash flows include borrowers' repayment of loan principal and payments of interest to Education, and loan disbursements by the government to borrowers. Unlike FFELP, FDLP involves no guaranteed yields or special allowance payments to lenders because the program is a direct loan program. The subsidy costs of FDLP consolidation loans are also affected by the interest Education must pay to Treasury to finance its lending activities. Another type of cost pertaining to consolidation loans is administration, which includes such items as expenses related to originating and servicing direct loans. In estimating loan subsidy costs, Education first estimates the future economic performance (net cash flows to and from the government) of direct and guaranteed loans when preparing its annual budgets. These first estimates establish the subsidy estimates for the current-year originated loans. The data used for the first estimates are reestimated in later years to reflect any changes in actual loan performance and expected changes in future performance. Reestimates are necessary because projections about interest and default rates and other variables that affect loan program costs change over time. Any increase or decrease in the estimated subsidy cost results in a corresponding increase or decrease in the estimated cost of the loan program for both budgetary and financial statement purposes. Recent years have seen a drop in interest rates for student loan borrowers along with dramatic overall growth in consolidation loan volume. From July 2000 to June 2003, the interest rate for consolidation loans dropped by more than half, with consolidation loan borrowers obtaining rates as low as 3.50 percent as of July 1, 2003. From fiscal year 1998 through fiscal year 2003, the volume of consolidation loans made (or originated) rose from $5.8 billion to over $41 billion. Over four-fifths of the fiscal year 2003 loan volume is in FFELP. While overall volume rose in 2003, the trends differed by program. FDLP consolidation loan volume for fiscal year 2003 decreased, but loan volume in the larger FFELP increased, resulting in total consolidation loan volume of well over $41 billion. The dramatic growth in consolidation loan volume in recent years is due in part to declining interest rates that have made it attractive for many borrowers to consolidate their variable rate student loans at a low, fixed rate. Figure 1 shows the relationship between these two factors. When interest rates are low, some borrowers may find it in their economic self- interest to consolidate their loans so that they can lock in a low fixed interest rate for the life of the loan, as opposed to paying variable rates on their existing loans, regardless of whether they need a consolidation loan to avoid difficulty in making loan repayments and avert default. Underscoring the potential attractiveness of these loans to potential borrowers, many lenders, including newer loan companies that are specializing in consolidation loans, have aggressively marketed consolidation loans to compete for consolidation loan business as well as to retain the loans of their current customers. Their marketing techniques have included mass mailings, telemarketing, and Internet pop-ups to encourage borrowers to consolidate their loans. This increased marketing effort has likely contributed to the record level of consolidation loan volume. While the estimated future costs for consolidation loans can vary greatly from year to year, low interest rates and recent loan volume changes have resulted in substantial increases in overall costs to the federal government. However, in light of the differences between how FFELP and FDLP operate, the subsidy costs within these two programs were affected in very different ways. For FFELP, the result was a substantial increase. For FDLP, the result was a narrowing of the net difference between the estimated interest payments paid by consolidated loan borrowers to Education and the costs paid by Education to Treasury to finance direct loans. Estimated subsidy costs for FFELP consolidation loans rose from $0.651 billion for loans made in fiscal year 2002 to $2.135 billion for loans made in fiscal year 2003. The increase is largely due to the higher interest subsidies the government is expected to pay to lenders to ensure they receive a guaranteed rate of return on student loans and the result of greater loan volume. The interest subsidy, which is called a special allowance payment (SAP), is based on a formula specified in law and paid by Education to lenders on a quarterly basis when the "guaranteed lender yield" exceeds the borrower rate. This guaranteed lender yield is currently based on the average 3-month commercial paper interest rate plus an additional 2.64 percent. When this guaranteed yield is higher than the amount of interest being paid by borrowers, Education makes up the difference. If the borrower's interest rate exceeds the guaranteed lender yield, Education does not pay a SAP, and the lender receives the borrower rate. Education's estimate of $2.135 billion in subsidy costs for FFELP consolidation loans made in fiscal year 2003 is based on the assumption that the guaranteed lender yield will rise over the next several years, reflecting Education's assumption that market interest rates are likely to rise from the historically low levels experienced in fiscal year 2003. The effect of this rise is shown in figure 2, where the bottom line shows the fixed borrower rate for a FFELP consolidation loan made in the first 9 months of fiscal year 2003, and the top line shows Education's estimated values for the guaranteed lender yield over time. In fiscal year 2003, market interest rates were such that the guaranteed lender yield established under the SAP formula was actually below the borrower rate. Lenders, therefore, received only the rate paid by borrowers; no SAP was paid. However, in future years, when the guaranteed lender yield is expected to increase and be above the borrower rate, Education would have to make up the difference in the form of a SAP. As figure 2 shows, Education's assumptions would call for lenders to receive a SAP over most of the life of the consolidation loans made in fiscal year 2003. An increase in loan volume also played a role in the subsidy cost increase from fiscal years 2002 to 2003. However, the effect of the increased loan volume was not as large as that of the higher interest subsidies the government is expected to pay to lenders in the future. Subsidy costs can occur within FDLP as well, but in a different way. FDLP's consolidation program is a direct loan program and, therefore, involves no guaranteed yields to private lenders. Still, the program has potential subsidy costs if the government's cost of borrowing is higher than the interest rate borrowers are paying. The government's cost of borrowing is determined by the interest rate Education pays Treasury to finance direct student loans, which is equivalent to the discount rate. The difference between borrowers' rates and the discount rate--called the interest rate spread--is a key driver of subsidy estimates for FDLP loans. When the borrower rate is greater than the discount rate, Education will receive more interest from borrowers than it will pay in interest to Treasury to finance its loans, resulting in a positive interest rate spread-- or a gain (excluding administrative costs) to the government. Conversely, when the borrower rate is less than the discount rate, Education will pay more in interest to Treasury than it will receive from borrowers, which will result in a negative interest rate spread--or a cost to the government. For FDLP consolidation loans made in fiscal years 2002 and 2003, no such negative interest rate spreads were incurred in either year, based on the methodology Education uses to determine these costs. In both years, borrower interest rates for FDLP consolidation loans were somewhat higher than the discount rate, resulting in a net gain to the government. However, while Education continued to benefit from lending at interest rates higher than its cost of borrowing for FDLP consolidation loans made in fiscal year 2003, the size of this benefit declines from $571 million in fiscal year 2002 to $543 million in fiscal year 2003. The smaller net gain that occurred in fiscal year 2003 reflects both a decrease in the loan volume and a narrowed difference between the discount rate and the borrower rate. Loan volume in fiscal year 2003 was $6.7 billion, a decrease from $8.8 billion in fiscal year 2002. In fiscal year 2003, this difference narrowed in part because borrower rates dropped more than the discount rate. The borrower rates for FDLP consolidation loans dropped 1.2 percentage points, from 6.3 percent in fiscal year 2002 to 5.1 percent in fiscal year 2003. The discount rate, on the other hand, dropped by only 0.88 percentage points, from 4.72 percent in fiscal year 2002 to 3.84 percent in fiscal year 2003. The resulting interest rate spread decreased from 1.59 percent to 1.22 percent (see table 2). In other words, each $100 of consolidated FDLP loans made in fiscal year 2002, will result in $1.59 more in interest received by Education than it will pay out in interest to the Treasury. A similar loan originated in fiscal year 2003, however, will generate only $1.22 more in interest for the government. Loan volume affects administrative costs, in that cost is in part a function of the number of loans originated and serviced during the year. As a result, when loan volume increases, administration costs also increase. Education's current cost accounting system does not specifically track administration costs incurred by each of the student loan programs. Consequently, we were unable to determine the total administration costs incurred by consolidation loan programs or any off-setting administrative cost reductions associated with the prepayment of loans underlying consolidation loans. However, based on available Education data, we were able to determine some of the direct costs associated with the origination, servicing, and collection of FDLP consolidation loans. For fiscal year 2002, these costs totaled roughly $52.3 million. This does not include overhead costs, which include costs incurred for personnel, rent, travel, training, and other activities related to maintaining program operations. For fiscal year 2003, the estimated costs for the origination, servicing, and collection of FDLP consolidation loans is projected to increase to $59.5 million. While we similarly were unable to determine Education's administration costs directly related to FFELP consolidation loans, they are likely to be smaller than for FDLP consolidation loans. This is because a large portion of FFELP administration cost is borne directly by lenders, who make and service the loans. The special allowance payments to lenders, which rise and fall as interest rates change, are designed to ensure that lenders are compensated for administration and other costs and provided with a reasonable return on their investment so that they will continue to participate in the program. As the discussion of both FFELP and FDLP loans shows, interest rates have a strong effect on whether subsidy costs occur and how large they are. The movement of subsidy costs for consolidation loans made in future years will depend heavily on what happens to interest rates. As we have shown, subsidy cost estimates for FFELP consolidation loans can increase substantially, depending on how much the guaranteed lender yield rises above the fixed rate paid by borrowers, which, in turn, requires the federal government to pay subsidies to lenders. Conversely, if borrowers obtained consolidation loans with a fixed interest rate at a time when rates were expected to decrease in the future, federal subsidy costs could be lower, than is currently the case, because the borrower rate could exceed the rate guaranteed to lenders, and the federal government might not be required to pay lender subsidies. For FDLP consolidation loans, allowing borrowers to lock in a low fixed rate might result in decreased federal revenues if the variable interest rates on those loans borrowers converted to a consolidation loan would have otherwise increased in the future. The exact effects of FDLP consolidation loans, however, depend on a number of factors, including the length of loan repayment periods, borrower interest rates, and discount rates. We noted in our prior report that borrowers' choices between obtaining a fixed rate consolidation loan or retaining their variable rate loans can significantly affect federal costs. While consolidation loans may be an important tool to help borrowers manage their educational debt and thus reduce the cost of student loan defaults, the surge in the number of borrowers consolidating their loans suggests that many borrowers who face little risk of default are choosing consolidation as a way of obtaining low fixed interest rates--an economically rational choice on the part of borrowers. If borrowers continue to consolidate their loans in the current low interest rate environment, and interest rates rise, the government assumes the cost of larger interest subsidies. Providing for these larger interest subsidies on behalf of a broad spectrum of borrowers may outweigh any government savings associated with the reduced costs of loan defaults for the smaller number of borrowers who might default in the absence of the repayment flexibility offered by consolidation loans. In our October 2003 report, we also discussed the extent to which repayment options other than consolidation loans allow borrowers to simplify loan repayment and reduce repayment amounts. We found that other repayment options that allow borrowers to make a single payment to cover multiple loans and smaller monthly payments are now available for some borrowers under both FFELP and FDLP, but these alternatives are not available to all borrowers. In that report, we concluded that restructuring the consolidation loan program to specifically target borrowers who are experiencing difficulty in managing their student loan debt and at risk of default, and/or who are unable to simplify and reduce repayment amounts by using existing alternatives, might reduce overall federal costs by reducing the volume of consolidation loans made. In addition, making the other nonconsolidation options more readily available to borrowers might be a more cost-effective way for the federal government to provide borrowers with repayment flexibility while reducing federal costs. An assessment of the advantages of consolidation loans for borrowers and the government, taking into account program costs and the availability of, and potential change to, existing alternatives to consolidation, and how consolidation loan costs could be distributed among borrowers, lenders, and the taxpayers, would be useful in making decisions about how best to manage the consolidation loan program and whether any changes are warranted. In our October 2003 report, we recommended that the Secretary of Education assess the advantages of consolidation loans for borrowers and the government in light of program costs and identify options for reducing federal costs. We suggested options that could include targeting the program to borrowers at risk of default, extending existing consolidation alternatives to more borrowers, and changing from a fixed to a variable rate the interest charged to borrowers on consolidation loans. We also noted that, in conducting such an assessment, Education should also consider how best to distribute program costs among borrowers, lenders, and the taxpayers and any tradeoffs involved in the distribution of these costs. Furthermore, if Education determines that statutory changes are needed to implement more cost-effective repayment options, we believe it should seek such changes from Congress. Education agreed with our recommendation. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the Committee may have. For further contacts regarding this testimony, please call Cornelia M. Ashby at (202) 512-8403. Individuals making key contributions to this testimony include Jeff Appel, Susan Chin, Cindy Decker, and Julianne Hartman-Cutts. 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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Consolidation loans, available under the Department of Education's (Education) two major student loan programs--the Federal Family Education Loan Program (FFELP) and the William D. Ford Direct Loan Program (FDLP)--help borrowers manage their student loan debt. By combining multiple loans into one loan and extending the repayment period, a consolidation loan reduces monthly repayments, which may lower default risk and, thereby, reduce federal costs of loan defaults. Consolidation loans also allow borrowers to lock in a fixed interest rate, an option not available for other student loans. Consolidation loans under FFELP and FDLP accounted for about 48 percent of the $87.4 billion in total new student loan dollars that originated during fiscal year 2003. Two main types of federal cost pertain to consolidation loans. One is "subsidy"--the net present value of cash flows to and from the government that result from providing these loans to borrowers. For FFELP consolidation loans, cash flows include, for example, fees paid by lenders to the government and a special allowance payment by the government to lenders to provide them a guaranteed rate of return on the student loans they make. For FDLP consolidation loans, cash flows include borrowers' repayment of loan principal and payments of interest to Education, and loan disbursements by the government to borrowers. The subsidy costs of FDLP consolidation loans are also affected by the interest Education must pay to the Department of Treasury (Treasury) to finance its lending activities. The second type of cost is administration, which includes such items as expenses related to originating and servicing direct loans. This testimony focuses on two key issues: (1) recent changes in interest rates and consolidation loan volume and (2) how these changes have affected federal costs for FFELP and FDLP consolidation loans. Recent years have seen a drop in interest rates for student loan borrowers along with dramatic overall growth in consolidation loan volume. From July 2000 to June 2003, the interest rate for consolidation loans dropped by more than half, with consolidation loan borrowers obtaining rates as low as 3.50 percent as of July 1, 2003. From fiscal year 1998 through fiscal year 2003, the volume of consolidation loans made (or "originated") rose from $5.8 billion to over $41 billion. The dramatic growth in consolidation loan volume in recent years is due in part to declining interest rates that have made it attractive for many borrowers to consolidate their variable rate student loans at a low, fixed rate. Recent trends in interest rates and consolidation loan volume have affected the cost of the FFELP and FDLP consolidation loan programs in different ways, but in the aggregate, estimated subsidy and administration costs have increased. For FFELP consolidation loans, subsidy costs grew from $0.651 billion for loans made in fiscal year 2002 to $2.135 billion for loans made in fiscal year 2003. Both higher loan volumes and lower interest rates available to borrowers in fiscal year 2003 increased these costs. Lower interest rates increase these costs because FFELP consolidation loans carry a government-guaranteed rate of return to lenders that is projected to be higher than the fixed interest rate paid by consolidation loan borrowers. When the interest rate paid by borrowers does not provide the full guaranteed rate to lenders, the federal government must pay lenders the difference. FDLP consolidation loans are made by the government and thus carry no interest rate guarantee to lenders, but changing interest rates and loan volumes affected costs in this program as well. In both fiscal years 2002 and 2003, there was no net subsidy cost to the government because the interest rate paid by borrowers who consolidated their loans was greater than the interest rate Education must pay to the Treasury to finance its lending. However, the drop in loan volume and interest rates that occurred in fiscal year 2003, contributed to cutting the government's estimated net gain from $570 million in fiscal year 2002 to $543 million for loans made in fiscal year 2003. Administration costs are not specifically tracked for either consolidation loan program, but available evidence indicates that these costs have risen, primarily reflecting increased overall loan volumes.
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The enactment of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (P.L. 104-193) dramatically altered the nation's system to provide assistance to the poor. Among many changes, title I of the act replaced the existing entitlement program for poor families (Aid to Families With Dependent Children) with fixed block grants to the states to provide Temporary Assistance for Needy Families (TANF). TANF provides about $16.5 billion annually for the states to use in helping families become self-sufficient. TANF imposes work requirements for adults and establishes time limits on the receipt of federal assistance. In addition, other federal programs are designed to help individuals move from welfare to work. For example, the Department of Labor (DOL) has a 2-year, $3 billion grant program, the Welfare-to-Work program, to help people with poor work histories, little or no education, or substance abuse problems obtain jobs. Transportation and welfare studies show that without adequate transportation, welfare recipients face significant barriers in trying to move from welfare to work. Existing public transportation systems cannot always bridge the gap between where the poor live and where jobs are located. These existing systems were originally established to transport inner-city residents to city locations and bring suburban residents to central-city work locations. However, many of the entry-level jobs that welfare recipients and low-income individuals would likely fill are located in suburbs that have limited or no access to existing public transportation systems. Furthermore, many entry-level jobs require shift work in the evenings or on weekends, when public transit services are either unavailable or limited. With the enactment of TEA-21, which established the Access to Jobs and Reverse Commute program, DOT became an important sponsor of welfare-to-work initiatives. In general, this program will provide grants to local agencies and authorities, nonprofit organizations, and transit authorities, among others, to improve mobility for low-income individuals seeking employment. TEA-21 authorized up to $750 million from fiscal year 1999 through fiscal year 2003 for the Access to Jobs program. Some of the funds are "guaranteed," that is, subject to a procedural mechanism designed to ensure that minimum amounts of funding are provided each year. The amount of funds subject to the "guarantee" increases each year so that by fiscal year 2003, the authorized funds are all "guaranteed." The Department of Transportation and Related Agencies Appropriations Act for fiscal year 1999 provided $75 million for the program rather than the $50 million subject to the "guarantee" and the maximum $150 million authorized. TEA-21 limits funding to 50 percent of each grantee's project. The remaining 50 percent can be obtained from a variety of sources, including some welfare programs administered by other federal agencies. Since TEA-21 established the Access to Jobs program in June 1998, DOT has begun establishing the program's basic structure and operating procedures. In May 1998, DOT established a task force of DOT officials to address several issues needing resolution before the program's implementation. The task force was divided into four working groups focusing on the (1) distribution of funds, (2) criteria for selecting grantees and administrative requirements, (3) coordination among federal agencies and public outreach, and (4) program's evaluation. Each working group was assigned several subsidiary issues. For example, the group working on the distribution of funds was tasked with determining the size of the program's grants. On October 22, 1998, DOT officially released guidance detailing how potential grant applicants can request Access to Jobs funds. According to the guidance, grant applications are to be submitted by December 31, 1998. DOT plans to evaluate the applications and notify the successful applicants in February 1999. Although TEA-21 established a framework for allocating Access to Jobs funds to applicants, it gave DOT the discretion to decide how best to distribute the funds each year. Since the program began in June 1998, the Department has made preliminary decisions to maximize the number of first-year grants by setting suggested limits on the amount of grants available to areas with different population levels, such as areas with over 1 million people. TEA-21 requires DOT to allocate the available funding between urban and rural areas. Specifically, the act requires DOT to allocate 60 percent of the program's funds each year to projects in urban areas with populations of at least 200,000; 20 percent of the program's funds to projects in urban areas with populations of less than 200,000; and 20 percent of the program's funds to projects in areas other than urban. In addition, the conference report on the Department of Transportation and Related Agencies Appropriations Act for fiscal year 1999 directed DOT to give high priority to rural counties that are not served or are underserved by public transportation. The Department of Transportation and Related Agencies Appropriations Act for fiscal year 1999 provided DOT with $75 million for its Access to Jobs program. To maximize the number of grants awarded, DOT is asking areas with specified populations to apply for grants limited to specified funding targets. DOT suggests that urban areas with populations of over 1 million should generally limit their requests to about $1 million, while rural areas with populations of less than 50,000 should request about $150,000. DOT also suggests average grant sizes for areas with populations ranging from 1 million to 200,000 and from 200,000 to 50,000. According to information from DOT, these recommended grant amounts would permit the Access to Jobs program to award grants to about 74 percent of the largest metropolitan areas in the country (about 25 locations), about 38 percent of the areas with populations from 200,000 to 1 million (about 35 locations), about 21 percent of the areas with populations from 50,000 to 200,000 (about 60 locations), and about 3 percent of small rural areas (about 99 locations). According to DOT officials, this approach for distributing the program's funding may discourage the legislative designation, or earmarking, of funds for specific projects, as is done for some other DOT programs, such as the Federal Transit Administration's (FTA) New Starts program for fixed guideway systems. In addition, DOT officials noted that an average of $150,000 for each rural applicant is in line with the potential need of these areas. For example, the Community Transportation Association of America, a nonprofit organization, told DOT that Access to Jobs grants of $150,000 would be adequate for many smaller rural areas. Finally, a group of rural counties in southern Illinois told DOT that $127,000 would be adequate to extend bus service on all their existing lines on evenings and weekends, thereby greatly benefiting welfare-to-work programs in the area. Grants of $1 million for large urban areas are smaller than those awarded by other federal agencies, such as DOL. For example, three Chicago-area grantees received DOL grants totaling almost $11 million, including a $3 million grant focusing on welfare-to-work transit services. Under DOT's suggested funding levels, the Chicago area may receive only $1 million in Access to Jobs funds. But if an Access to Jobs grant is combined with other welfare reform funding for projects supporting transportation, the combined funding may help to address welfare-to-work transportation needs in urban areas. For example, the Chicago area has received federal grants that support transportation for welfare recipients and low-income individuals from both DOL's $3 million competitive Welfare-to-Work grant program and the Department of Housing and Urban Development's (HUD) Bridges to Work program. Finally, DOT's guidance acknowledges that some potential grantees may have developed plans for job access activities whose implementation costs exceed the grant sizes suggested for fiscal year 1999. Such grantees may choose to fund their high-priority activities in the first year and use subsequent grants to fund additional elements of their plans. Applicants may also elect to use their grants for fiscal year 1999 to cover the initial costs of job access activities and use subsequent grants for carry-on activities. According to DOT's guidance, a multiyear approach will be subject to an annual review of the grantee's progress as well as the annual budget and appropriations process, among other things. According to DOT officials, potential grantees have expressed an interest in a multiyear approach because they need several years to fully develop, implement, and see results from their welfare-to-work projects. For example, several years may be needed to incorporate new transit service into communities' existing transportation systems. TEA-21 specifies several factors that the Secretary must consider when evaluating applications for Access to Jobs grants and making final selections. In implementing TEA-21, DOT has synthesized these factors into four essential elements that an application must address: a project's effectiveness, an area's need for services, the degree of local coordination, and the project's financial sustainability. In addition, DOT will give bonus points for other program elements, such as innovation. While the Department announced final guidance on the selection process in October 1998, it is not clear whether these criteria will allow DOT to differentiate sufficiently among the many applications it may receive. DOT's guidance indicates that in addition to the specified weighted criteria, the Department may consider other factors, such as the geographic distribution of grantees, in awarding the grants. The weighted, merit-based factors may be sufficient to rank projects according to their relative merits; however, if the additional factors are needed, their use may imply that the merit-based criteria are less important than other factors, such as a project's location, that are not based on merit. TEA-21 requires the Secretary to conduct a national solicitation for grant applications and competitively select grant recipients. For areas with populations of at least 200,000, each area's metropolitan planning organization will screen the applications. States will perform the same function for areas with populations of less than 200,000. TEA-21 specified eight factors for the Secretary of Transportation to consider when awarding Access to Jobs grants. These factors are the percentage of welfare recipients in the population of the area to be served; the need for transportation services; the extent of coordination with, and the financial commitment of, existing transportation service providers and the state welfare agency; the extent of coordination with the community to be served; the use of existing transportation services; the use of innovative approaches; the existence of regional transportation plans; and the existence of long-term financing strategies. After internal and external discussions, DOT arrived at four "essential" criteria for evaluating and scoring applications: (1) a project's effectiveness, (2) an area's need for services, (3) the degree of local coordination, and (4) the project's financial sustainability. Table 1 shows the weight DOT has assigned to each criterion. In applying the criterion for the project's effectiveness, DOT officials will attempt to ensure that the approach described in the grant application addresses the transportation problem the grant is trying to alleviate. Similarly, the criterion for need, measured by things such as the number of low-income individuals to be helped and the types of transportation services to be added, is intended to ensure that the application identifies the need for a DOT grant. DOT also believes that its criterion on local coordination will help providers of transportation and human services understand the importance of local coordination to a project's success. DOT officials noted that it may still be difficult to determine if there is "real," or merely perfunctory, coordination among these groups. DOT also included a criterion to evaluate an applicant's ability to obtain sustained funding for a project after the grant funds have been expended. Finally, DOT will give bonus points for applications that use, among other things, innovative approaches, links to employment support services, and employer-based strategies (such as employer-run shuttles). According to DOT officials, because DOT will give bonus points to projects that address how their proposed transportation services will be supported by employment and human services, these points will encourage local coordination. DOT officials developed these criteria by combining legislative criteria and adding other specific components. For example, DOT combined the two legislative criteria for coordination with the one criterion for regional plans to develop one criterion for a coordinated human services/transportation planning process and plan. DOT also added a criterion for employers' involvement. Finally, DOT added weights to the revised list of criteria and discussed this list with leaders of other federal agencies, including the Department of Health and Human Services (HHS) and DOL. After their discussions, DOT reduced the criteria to the four listed in table 1. DOT staff believe that their weighted evaluation criteria will provide clear breaks among application scores if, because of limited funds, the Department is required to choose among eligible projects. However, DOT's guidance also indicates that, in addition to the weighted criteria, the Department will consider other factors in selecting grantees--(1) the schedule for implementing the project, (2) the availability of funds, and (3) the geographic distribution of grants throughout the country. When DOL evaluated applications for grants during the first year of its Welfare-to-Work program, it had more applications that were deemed "competitive" (scoring over 80 points) than available funds. Even after using bonus points, DOL had more applications than available money. Accordingly, DOL used additional factors, such as geographic location and rural/urban representation, to help make the final selection. Until DOT receives and begins scoring Access to Jobs grant applications, it will not know if its weighted criteria will be sufficient to distinguish among applications or if it will need to rely on the additional factors it identified, such as geographic dispersion. The Congress recognized the importance of coordinating welfare-to-work activities to help ensure the success of welfare reform. DOT has taken a number of steps to coordinate its Access to Jobs program with the welfare activities of HHS, DOL, and HUD. DOT invited executive-level representatives from these departments to join a policy council to provide a forum for discussing Access to Jobs implementation issues. In addition, before the Access to Jobs program was authorized, the Secretaries of Transportation, HHS, and Labor issued joint guidance to states and localities describing how each department's programs could be used together to implement transportation services under welfare reform. DOT plans to sustain its working relationship with federal social service agencies by using their expertise to help select grants that will support welfare reform's goals. Finally, DOT addressed the need for local coordination by requiring grant applicants to submit projects that are the result of a regional planning process that includes representatives from both transit and social service providers. TEA-21 requires DOT to coordinate its Access to Jobs activities with other federal agencies' welfare-to-work programs. In May 1998, we reported on the role of transportation in welfare reform and recommended that DOT work with other federal agencies, such as HHS, DOL, and HUD, to coordinate all of their welfare-to-work activities. DOT agreed with our recommendation, noting that coordination is important to ensure the success of welfare-to-work programs. First, federal agencies can encourage state and local transportation and human service agencies and other local organizations to combine their expertise to develop comprehensive welfare-to-work projects that include a transportation component. Second, federal agencies need to work together to ensure that their funds for welfare-to-work programs are used to complement, rather than duplicate, one another. Such coordination is particularly important for the recipients of Access to Jobs grants because these grants fund only 50 percent of a project's total costs. Grantees can use federal funds such as HHS' TANF funds or DOL's Welfare-to-Work grants to fund the remaining 50 percent. To facilitate coordination among federal welfare-to-work programs, FTA initiated a policy council in July 1998 and invited representatives from DOL, HHS, HUD, the Office of Management and Budget, and the White House to join. (App. I lists the council's membership). According to DOT, the council was established to advise the Department on implementing the Access to Jobs program, as well as to keep other agencies apprised of DOT's actions. Members of the council have worked on a number of issues associated with implementing the Access to Jobs program and have reviewed the program's draft guidance prior to issuance. In addition, DOT and DOL, according to DOT officials, are working together to ensure that Access to Jobs grantees adhere to statutory labor protection requirements. The Secretaries of Transportation, HHS, and Labor have also worked to coordinate their welfare-to-work programs. In May 1998, the Secretaries issued joint guidance explaining how human service organizations can use HHS' TANF funds and DOL's Welfare-to-Work grants to provide transportation services for people moving from welfare to work. For example, the guidance notes that state human service organizations can use TANF funds to provide transit passes for welfare recipients or reimburse TANF recipients for work-related transportation expenses. The guidance also encourages local transportation, workforce development, and social service providers to coordinate their activities to ensure the most efficient use of federal funds. Now that Access to Jobs funds are available, DOT officials said, HHS, DOL, and DOT will issue updated guidance explaining how their welfare-to-work programs can be coordinated. In addition, DOT's guidance states that the Department will establish an interagency work group to help it review applications for Access to Jobs grants. These applications should include information on how transportation services will be coordinated with social services, such as the job placement activities that DOL provides for TANF recipients. DOT officials expect that staff from other federal agencies like DOL and HHS will be able to help DOT assess the viability of the proposed coordination efforts. In this way, DOT will be able to take advantage of the other agencies' experience with welfare reform projects to help determine which transportation projects will benefit welfare recipients seeking jobs. Finally, the Congress and DOT believe local coordination among social service and transportation organizations is important for a project's success. Both the metropolitan planning provisions and the Access to Jobs provisions of TEA-21 emphasize the importance of involving a wide variety of local groups in the coordination of transportation services. For example, TEA-21 states that each Access to Jobs grant project shall be part of a coordinated transportation planning process, involving both public transit and human service agencies. DOT's Access to Jobs guidance also states that grantees must include transportation and human service groups in their planning process. DOT's published grant award criteria encourage local coordination by providing 25 points for a coordinated human services/transportation planning process and regional job access transportation plan, as well as bonus points for grant projects linked to employment-related support services. Finally, DOT officials said that they have sought to encourage local coordination through their outreach efforts, including presentations and meetings on TEA-21 and the Access to Jobs program held throughout the country. Evaluation is important because the Congress, program officials, the business community, advocacy groups, and taxpayers need to know if newly designed welfare reform programs, such as the Access to Jobs program, are working. When it announced the program's guidance in October 1998, DOT provided information on how it would monitor projects funded through the program. Specifically, DOT said that it expects grantees to monitor the performance of their projects and provide DOT with data on four project outputs. However, the data collected by the grantees may not measure the program's overall performance until DOT establishes goals or benchmarks to evaluate the information it receives from the grantees. Experts say that evaluation is critical in determining the effect of welfare reform. However, an early look at welfare reform initiatives suggests that such evaluations are not routinely done. Transportation experts at the University of California are assessing how public agencies in California charged with developing and/or implementing transportation policies and programs are evaluating transportation efforts in welfare reform. In their project proposal, the experts stated that evaluation was a critical component of welfare-to-work programs; however, few welfare-to-work programs contained an evaluation component. Consequently, the experts concluded that administrators have implemented some welfare-to-work transportation policies and programs without plans to evaluate their effectiveness. Other experts expressed concern about evaluating welfare reform programs before the Subcommittee on Human Resources, House Committee on Ways and Means, in a March 1998 hearing. The hearing focused on how policymakers could be informed of the effects of welfare reform, given the wide variation in program design and the growing number of agencies involved. The Director of the Research Forum on Children, Families, and the New Federalism--an initiative of the National Center for Children in Poverty--was a witness at this hearing. According to the Forum, as new welfare programs are implemented across the country, the conceptual framework and methods must change and adapt; research must be flexible to study diverse combinations of programs, policies, and funding. Since policy and program changes occur frequently, the Forum concluded that research must provide information quickly to be most useful, particularly so that practitioners can identify and address problems early in the process. TEA-21 requires DOT to evaluate the program 2 years after the act's enactment. In May 1998, we recommended that DOT establish specific objectives, performance criteria, and measurable goals for the Access to Jobs program. DOT concurred with our recommendation. In addition, the Government Performance and Results Act of 1993 (Results Act), enacted to improve the effectiveness of and accountability for federal programs, requires agencies to identify annual performance goals and measures for their program activities. In announcing the Access to Jobs program in October 1998, DOT established two major goals for it--(1) to provide transportation services to assist welfare recipients and low-income persons in gaining access to employment opportunities and (2) to increase collaboration among transportation providers, human service agencies, employers, metropolitan planning organizations, states, and affected communities and individuals. DOT expects grantees to monitor the performance of their Access to Jobs project and to provide the Department with data on (1) how many transportation services the project added (service frequency, hours, and miles); (2) how the target area's accessibility to jobs and support services improved (i.e., how the percentage of available jobs accessible to the target population by public transportation increased with the program); (3) how many people are using these expanded services; and (4) how the project's sponsors collaborated. These measures relate specifically to transportation services--not to other related services, such as those matching people to available jobs--and reflect DOT's philosophy that transportation alone will not ensure successful employment for the target population. However, these steps set up a data collection plan without establishing how the program's success will be evaluated. DOT's guidance does not specify key measurable goals for the program, such as increasing by an appropriate percentage the number of jobs accessible by public transportation. As a result, once the data are collected, DOT has no standard for measuring success and no method for determining whether the data are indicative of the program's success. In responding to our May 1998 report, DOT agreed to revisit and refine its strategic plan as it applies to the Access to Jobs program and to develop performance goals and performance measures for incorporation into the Department's fiscal year 2000 Performance Plan. While DOT's activities mark progress towards an evaluation process, DOT has begun to implement the Access to Jobs program without plans for evaluating its effectiveness. According to DOT's Access to Jobs coordinator, DOT recognizes that evaluation is important to the Access to Jobs program. DOT had included a specific provision on evaluation in its program proposal. But because DOT wanted to distribute the money to start projects as quickly as possible, it chose to save evaluation issues until later. However, DOT is not currently certain how it will analyze the collected data to evaluate the nationwide success of the Access to Jobs program or what additional information it may request from grantees for this purpose. While the program's guidance is essentially complete for fiscal year 1999, the Department may add further details on performance measurement when it awards funds to the fiscal year 1999 grantees. Department officials said they plan to provide additional guidance on performance indicators for future applicants. Since TEA-21 established the Access to Jobs program in June 1998, DOT has made important strides in developing an overall framework for implementing this new program. The Department has resolved many of the program implementation challenges we cited in our May 1998 report. Specifically, it has made some important decisions about how it will distribute the program's funds, what criteria it will use to review grant applications, and how it will coordinate the program with other federal agencies' efforts. However, the Department has not yet fully set forth the methods it will use to evaluate the program's success, as we recommended in our earlier report. Establishing performance measures for the Access to Jobs program is important because doing so will enable the Department to have benchmarks for evaluating the data it will receive from Access to Jobs grantees. Establishing performance measures will also enable the Department to begin its own legislatively required evaluation of the program's success. If the Department implements our recommendation, it will establish specific objectives, performance criteria, and measurable goals for this new program and include them in its fiscal year 2000 Performance Plan. Since this plan will be submitted to the Congress in connection with the fiscal year 2000 budget in the spring of 1999, Access to Jobs grantees would be aware of these objectives, criteria, and goals as they began to implement their projects. We provided a draft of this report to DOT for review and comment. We met with DOT officials--including the Acting Director of the Office of Policy, Office of the Secretary, and the coordinator for the Access to Jobs program, Federal Transit Administration--to discuss the Department's comments on the draft report. Overall, DOT agreed with our findings. However, the officials stated that while the report accurately describes the decisions the Department has made since the program's inception, it does not sufficiently describe the program's rapid development. They noted that the program was recently authorized, in June 1998, and they have rapidly made important decisions to ensure that fiscal year 1999 grants are awarded quickly. They also provided the following points to clarify certain aspects of the new program. First, they said that they had conducted extensive outreach efforts intended to provide the public with information on the program's implementation and to involve nontraditional groups, such as human service organizations and community-based organizations, in the process. Second, DOT officials noted that in addition to coordinating the program at the federal level, they have stressed local coordination as an equally important component of the Access to Jobs program. Officials noted that the program's guidance should encourage localities to build upon local transportation planning processes as well as increase opportunities to incorporate new players in the planning process. Finally, the officials acknowledged the importance of further developing DOT's plans to evaluate the program and affirmed that the Department will include performance measures for the program in its fiscal year 2000 Performance Plan. On the basis of DOT's comments, we included additional information in the report on the Department's efforts to encourage local coordination and to obtain guidance from transportation and nontraditional partners. DOT had additional technical comments that we incorporated throughout the report, where appropriate. For its review and comment, we also provided DOL with sections of the draft report that specifically dealt with issues pertaining to it. Overall, officials agreed with the information. We incorporated DOL's technical comments throughout the report, where appropriate. To obtain information on the steps DOT has taken to implement the Access to Jobs program--specifically, to distribute funds and select criteria for awarding grants--we interviewed DOT officials; examined program documentation, preliminary reports, and other descriptive materials; and attended the October 22, 1998, conference in which DOT announced the Access to Jobs program, as well as a September 23, 1998, listening session on TEA-21, sponsored by FTA. To identify the efforts DOT has made to coordinate its work with that of other federal agencies, we interviewed key officials in FTA and DOL and kept abreast of efforts by members of our staff working on related projects. To address the evaluation issue, we interviewed DOT, FTA, and DOL officials; reviewed relevant program documentation; and gathered opinions from selected outside organizations and universities. In addition, we visited the Metropolitan Area Planning Council in Boston, a DOL Welfare-to-Work program grantee, to obtain its views on implementing the Welfare-to-Work program and evaluating its results. We performed our review from June 1998 through November 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to interested congressional committees, the Secretary of Transportation, the Secretary of Labor, and the Administrator of FTA. We will also make copies available to others on request. If you have any questions about this report, please call me at (202) 512-2834. Major contributors to this report were Ruthann Balciunas, Joseph Christoff, Catherine Colwell, and Phyllis Scheinberg. Cynthia Rice, Domestic Policy Council, White House Andrea Kane, Domestic Policy Council, White House Emil Parker, National Economic Council, White House Barbara Chow, Associate Director, Office of Management and Budget Michael Deich, Associate Director, Office of Management and Budget John Monahan, Principal Deputy Assistant Secretary for Children and Families, Department of Health and Human Services Jill Khadduri, Acting Assistant Secretary for Policy Development and Research, Department of Housing and Urban Development Ray Uhalde, Acting Assistant Secretary for Employment and Training, Department of Labor 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 legislative requirement, GAO reviewed the Department of Transportation's (DOT) efforts to implement the Access to Jobs program, focusing on DOT's: (1) overall plan to distribute Access to Jobs funds among grantees in urban and rural areas; (2) criteria to award specific Access to Jobs grants to states, localities, and other organizations; (3) efforts to coordinate the Access to Jobs program with other welfare-to-work programs; and (4) proposals to evaluate the program's success. GAO noted that: (1) DOT has decided it will distribute the $75 million available for the program in fiscal year 1999 to as many people as possible by setting suggested limits on the amount areas can receive on the basis of their population levels; (2) under this approach, DOT intends to provide first-year grants that average $1 million for large urban areas and $150,000 for rural areas; (3) DOT will use four key criteria for evaluating grant applications on the basis of their merits; (4) DOT will assess each grant application and assign points on the basis of these criteria, as well as bonus program components such as particularly innovative transportation approaches; (5) whether these criteria will enable DOT to make sufficient distinctions among the many applications it expects is unclear; (6) accordingly, DOT may use other factors; (7) however, DOT may unintentionally suggest that merit-based criteria used to score applications are less important than other factors that are not based on merit; (8) DOT has made efforts to coordinate its Access to Jobs program with other welfare-to-work programs; (9) DOT established a policy council of representatives from four other federal agencies and the White House and it met with local human service organizations; (10) because grantees can use other federal funds to match the DOT's grants, sustained coordination between DOT and other federal agencies, as well as sustained collaboration among local agencies, is critical for ensuring the effective use of federal welfare-to-work programs; (11) as part of its evaluation effort, DOT will require Access to Jobs grantees to collect data on four important program outputs: (a) the number of new and expand transportation services; (b) the number of jobs made accessible by public transportation to the targeted riders; (c) the number of people using the new transportation services; and (d) the level of collaboration achieved; and (12) however, the data alone will not be sufficient to measure the program's overall success because DOT has yet to establish goals or benchmarks against which the cumulative data on new routes, new system users, and newly accessible jobs can be compared.
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Under the authority of the Arms Export Control Act, State regulates and controls arms exports by U.S. companies to help ensure that those exports are consistent with national security and foreign policy interests. This function has been delegated to DDTC within the Bureau of Political- Military Affairs. DDTC's staffing levels are allocated and funded by State. Funding for other DDTC activities and operations comes from two main sources: (1) appropriated funds that State then allocates to DDTC through the Bureau of Political-Military Affairs, and (2) registration fees, which DDTC is authorized to retain to help fund certain activities related to licensing, enforcement, and compliance. Exporters submit arms export cases via paper or electronically through D- Trade, DDTC's Web-based electronic processing system. Cases include permanent arms export licenses, temporary arms exports or imports, agreements between U.S. industry and foreign entities to provide technical assistance or manufacturing capability, requests for amendments to existing licenses or agreements, and requests to determine commodity jurisdiction. Cases vary in terms of complexity and time to process. For example, agreements generally take longer than other cases because they are complex, require substantial work by licensing officers, and often require interagency review. Once cases are received, DDTC assigns them to one of five teams, based on commodity categories: firearms, aircraft, missile and spacecraft, military electronics, and military vehicles and naval vessels. Team leaders, in turn, assign cases to a licensing officer, who conducts an initial review to determine whether the case needs a referral to an agency, such as DOD's DTSA, and/or another State bureau for additional review--or whether the case can be reviewed and analyzed internally. Either way, the licensing officer conducts the final review and determines the final action. Final action on cases can only be taken by licensing officers with designated signature authority, which DDTC officials stated takes an average of 18 months of training and experience to obtain. Prior to approving cases that involve exports meeting statutory dollar thresholds and involving selected countries, State must notify Congress. Figure 1 depicts DDTC's licensing review process. In addition to reviewing arms export cases, DDTC conducts outreach to educate industry about export controls and promote compliance with laws and regulations. Our analysis shows several trends have emerged in the processing of arms export cases, which indicate the system is under stress. First, the number of arms export cases processed by DDTC has increased since fiscal year 2003. Most of the increase was for licenses for permanent export. Second, processing times almost doubled from fiscal year 2003 to 2006. Third, the number of open arms cases has increased since fiscal year 2003. While extraordinary actions taken by DDTC to address the mounting number of open cases achieved short-term gains, these actions are not sustainable because they strained personnel and involved deferring other mission- related activities. Between fiscal years 2003 and 2006, the arms export caseload processed by DDTC has increased 20 percent, from about 55,000 to 65,000. DDTC officials attributed this growth to several possible factors, including increased globalization of the defense industry and an overall increase in arms exports. In addition, our analysis of the cases processed by DDTC shows that permanent export licenses constituted about two-thirds of all cases, thereby accounting for the major part of DDTC's caseload activity. For these cases, the greatest increase occurred in aircraft and related components among the various types of controlled commodities. Our analysis also showed a high concentration of cases by country of destination--almost half consisted of seven countries, with 25 percent involving Japan and the United Kingdom. In contrast, we found cases are not concentrated by major defense arms exporting companies. In fiscal year 2006, only 21 percent of cases processed involved the top 10 arms exporting firms. (For additional analyses of cases, including type of case, commodities, countries, and expedited cases, see app. II.) Overall, processing times for all types of cases have increased. Between fiscal years 2003 and 2006, median processing times nearly doubled, from 14 days to 26 days. Some types of cases take longer to process than others, in part because of their complexity. For example, in fiscal year 2006, technical assistance agreements took a median of 94 days to process. However, these agreements made up less than 9 percent of the cases processed for that year, and therefore may not be a significant driver of overall increased processing times. Permanent exports, which constituted the majority of cases, took a median of 25 days to process in fiscal year 2006. For nonreferred cases, which made up about two-thirds of all cases, DDTC's in-house processing times increased significantly. For example, between fiscal years 2003 and 2006, median processing times for nonreferred cases increased from 8 to 19 days. For the first 7 months of fiscal year 2007, the median processing time was 17 days. Moreover, the number of nonreferred permanent export license cases taking longer than 2 weeks to process increased from 26 percent in fiscal year 2003 to 72 percent in fiscal year 2006. The increase in the percentage of nonreferred agreements taking longer than 2 weeks was even more dramatic--increasing from about 13 percent to 87 percent (see fig. 2). Processing times for cases referred outside of DDTC for review, which made up about one-third of all cases, have also increased. For example, between fiscal years 2003 and 2006, median processing times increased from 49 to 61 days. For the first 7 months of fiscal year 2007, the median processing time was 50 days. Moreover, in fiscal year 2006, 70 percent of referred agreement cases, which tend to take longer to process than other cases, took longer than 12 weeks to process, compared to 11 percent in fiscal year 2003. In contrast, processing times for permanent export license cases referred outside of DDTC have held relatively steady for the past several years (see fig. 3). The number of open arms export cases has also increased because DDTC has received cases at a higher rate than it processed them. Open cases increased from about 5,000 in October 2002 to about 7,500 in April 2007, reaching a high of more than 10,000 open cases in September 2006 (see fig. 4). At the beginning of fiscal year 2007, DDTC launched its "winter offensive," a campaign to reduce the growing number of open cases. Through extraordinary measures--such as extending work hours; canceling staff training, meetings, and industry outreach; and pulling available staff from other duties to process cases--DDTC was able to reduce the number of open cases by 40 percent in 3 months. However, DDTC officials told us that these measures were not sustainable for the long term because they put a strain on personnel and deferred mission-related activities. Not only are these short-term measures unsustainable, they may have unintended adverse consequences. A DDTC official stated the short-term emphasis during the winter offensive was necessary to reduce the number of open cases but may have the unanticipated effect of shifting the focus from the mission of protecting U.S. national security and promoting foreign policy interests to simply closing cases to reduce the queue of open cases. While some blips in the trends can be attributed to onetime events or efforts, such as the winter offensive, the overall trends of increased processing times and open cases are affected by several factors, including procedural inefficiencies, electronic processing system shortcomings, and human capital challenges. DDTC does not perform systematic assessments to identify overall trends and root causes, which could lead to sustainable solutions. While DDTC has established a time frame goal in its guidelines for referring cases outside of DDTC, it has not met this goal. Specifically, the guidelines indicate that DDTC licensing officers should refer cases to other agencies or State bureaus within 10 days of receipt by the licensing officer. Our analysis shows that DDTC has taken increasingly longer to refer cases. As shown in table 1, the median days from when the case was received to outside referral increased from 7 days in fiscal year 2003 to 20 days during the first 7 months of fiscal year 2007. In contrast, the median number of days cases spent outside of DDTC for referral has decreased over the same period from 31 to 18 days. DDTC has not established procedures to promptly screen most cases to identify those that need outside referral. As a result, cases often languish in a team leader's or licensing officer's queue awaiting assignment or initial review. In contrast, DOD's DTSA--which receives the majority of cases referred by DDTC--uses a team to screen cases daily to determine if cases should be reviewed solely at DTSA or whether they should be referred to military services or other DOD components for further review. In making the decision to refer cases, the team considers such factors as the existence of precedent cases, the level of technology, and the circumstances of the transaction. According to DTSA officials, this process allows them to expedite certain cases and to focus efforts on more complicated cases involving commodities or capabilities not previously exported or presenting special concerns. For referred cases, DTSA officials told us the daily screening process allows them to make the referral in less than 2 days on average. According to DDTC officials, they have recently established a process for promptly referring technical assistance agreements outside DDTC but have not done so for other types of cases. Until recently, DDTC lacked procedures for expediting certain cases. Specifically, the Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005, enacted in 2004, requires the expeditious processing of arms export cases for the United Kingdom and Australia by State, in consultation with DOD. Although the legislation does not specify a processing time frame goal, in fiscal year 2006, the processing times for United Kingdom and Australia cases was 21 days, which did not differ significantly from the processing times for other allied countries. (For additional analysis of processing times by country, see app. II.) DDTC officials told us they have been working with DOD on developing procedures to expedite processing for United Kingdom and Australia cases, and recently established a process for doing so. The establishment of a new automated system for processing cases had been cited by State officials as its most significant effort to improve efficiency. However, the anticipated efficiencies have not been realized. Our analysis of processing times shows no significant difference between like types of cases submitted electronically versus paper submissions. For example, in fiscal year 2006, median processing time for permanent export cases submitted through D-Trade was 23 days versus 25 for paper submissions. Although 77 percent of cases are now received electronically through D-Trade, its implementation has been problematic and electronic processing has not been the promised panacea for improving processing times. According to DDTC officials, poorly defined system requirements and a rush to production led to technical glitches and performance problems. For example, in January 2007, DDTC released a new version of D-Trade, but because of software problems, cases received could not be processed. As a result, the new version was shut down after 3 days, requiring DDTC to revert to the previous version. The 1,300 cases received during the 3-day period had to be resubmitted by exporters, resulting in some rework and an increase in the number of open cases. DDTC has relied on an information technology solution without reengineering the underlying processes or without developing tools to facilitate the licensing officer's job. In 2001, we reported information systems that simply use technology to do the same work, the same way, but only faster typically fail or reach only a fraction of their potential. While defense industry officials told us that D-Trade simplifies the process for submitting cases and receiving final authorizations, the system lacks tools to aid licensing officers to process cases more efficiently. For example, the system has limited capabilities to reference precedent cases that would allow licensing officers to leverage work previously done on similar cases. The system also lacks other tools, such as automated access to regulations, guidance, or other information that may facilitate processing. DDTC officials said they expect future versions of D-Trade will incorporate tools to help licensing officers process cases more efficiently. The fundamental work of reviewing and analyzing arms export cases requires an adequate number of personnel with the right skills and knowledge--especially given the continued rise in caseload. However, ensuring a sufficient workforce with the needed skills and knowledge has been a challenge for DDTC because of staffing instabilities. For example, the number of licensing officers on board has fluctuated over recent years and was at the same level in fiscal years 2003 and 2006, yet the number of cases processed increased about 20 percent during the same period (see table 2). DDTC officials have acknowledged that more work is falling on fewer experienced staff. According to these officials, in the summer of 2006, about one-half of licensing officers had less than 1 year of experience, and many did not have the signature authority needed to take final action on cases. For example, early in 2007, one team had three licensing officers but only the team leader had the authority to approve or deny cases. Although the staff could perform research, the team leader had to review all cases before final action could be taken. Staffing instabilities have also been affected by fluctuating levels of military officers detailed to DDTC from DOD, who are generally assigned to review agreements. The Foreign Relations Authorization Act for Fiscal Year 2003 states the Secretary of Defense should ensure that 10 military officers are continuously detailed to DDTC. However, the number of officers DOD detailed to DDTC has fluctuated over recent years. In fiscal year 2006, the number of military officers detailed to DDTC ranged from 3 to 7. From fiscal year 2005 to 2006, processing times for agreements nearly doubled from 48 days to 94 days. In fiscal year 2007, the number of military officers increased to 8, and by April 2007, processing times for agreements was 72 days. To help address the potential adverse effect of insufficient numbers of military officers, DDTC began assigning additional civilian licensing officers to process agreements in 2006. DDTC management does not systematically assess licensing data to identify inefficiencies. Analysis of these data could allow DDTC to more effectively structure its workforce and manage workload. Instead, DDTC management reviews reports consisting of aggregate information on received, processed, and open cases to determine the status of cases and licensing officer productivity. However, DDTC cannot identify the drivers of the workload or bottlenecks in the process from these status reports. Using DDTC's data, we conducted analyses of factors that can drive workload, such as type of cases, commodities, countries, and profiles of the exporter base (see app. II). Such analyses could provide insights to managers on ways to reduce workload, structure the workforce, target outreach with industry, and reengineer processes. For example: By examining caseload by type of commodity, DDTC could assess the impact on workload of potential changes to licensing requirements such as application of or modification to exemptions--if such changes are warranted given the national security risk and foreign policy interests. Given DDTC's current organizational structure of teams associated with particular commodities, DDTC could examine its licensing data to determine if there is a concentration of cases by factors other than commodity, such as country. Such analyses could permit DDTC to consider possible efficiencies related to aligning its workforce to where its workload is concentrated. Also, by monitoring processing times for factors driving the workload, DDTC could take corrective actions and reallocate resources before processing times for some types of cases become a problem. By assessing the volume and type of case submissions by exporters, DDTC could better target its industry education and outreach activities to help ensure the quality of submissions and compliance with export control law and regulations. DDTC could analyze the processing times associated with steps in the licensing process--such as time it takes to refer cases--to assess the flow of cases through the review process and identify possible bottlenecks or inefficiencies in the process. While DDTC has taken actions to achieve some short-term gains to growing problems in its processing of cases, DDTC managers lack systematic analyses to identify root causes and develop sustainable solutions. Federal managers, including those at DDTC, need to monitor and assess their systems to ensure that they are well designed and efficiently operated, are appropriately updated to meet changing conditions, and provide reasonable assurance that the objectives of the agency are being achieved. The licensing of arms exports is a key component of the U.S. export control system to help ensure arms do not fall into the wrong hands. Licensing officers are challenged to weigh national security and foreign policy interests on thousands of cases a year while allowing legitimate defense trade to occur in an efficient manner. However, systemic inefficiencies in arms export licensing are straining the system and may be diminishing licensing officers' capacity to process cases efficiently and effectively. To date, DDTC has not comprehensively analyzed its export processing system to identify causes of inefficiencies and needed actions to address them. Unless DDTC systematically analyzes its licensing data in terms of drivers of workload and steps in the process, it will continue to ineffectively and inefficiently manage its processes, workload, and resources. To improve the efficiency of processing arms export cases, we recommend that the Secretary of State direct the Deputy Assistant Secretary of the Directorate of Defense Trade Controls to conduct systematic analyses of licensing data to assess root causes of inefficiencies and to identify and implement actions to better manage workload, reexamine its processes, determine the most effective workforce structure, and target industry outreach. We provided a draft of this report to the Departments of State and Defense and for their review and comment. DOD did not comment on our draft. State provided written comments that are reprinted in appendix III. In commenting on the draft, State concurred with our recommendation and recognized the need for additional systematic analyses of data to achieve greater efficiencies. State noted that the report does not reflect the impact of three recent initiatives, which according to State resulted in a 30 percent reduction of open cases from April to October 2007. Because our analysis was through April 2007, we are not able to verify what effects--both short- and long-term--the initiatives have had on the number of open cases. Until State engages in a continual process of systematically analyzing its licensing data, it will have no assurance that current or future initiatives will address the underlying causes and achieve sustainable improvements to the processing of arms export cases. As agreed with your office, unless you publicly release its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies of this report to interested congressional committees, as well as the Secretaries of State and Defense; the Director, Office of Management and Budget; and the Assistant to the President for National Security Affairs. In addition, this report will be made available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-4841 or [email protected] if you or your staff have any questions concerning this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Others making key contributions to this report are listed in appendix IV. To determine trends in arms export case processing by State's Directorate of Defense Trade Controls (DDTC), we obtained State's arms export case data for fiscal year 2003 through April 30, 2007. We obtained data from State's paper-based "legacy" system and its D-Trade system--a Web-based electronic processing system. We merged the data from these two systems and created a single Microsoft Access database to determine trends in caseload, cases processed, open cases, and processing times. Our analysis did not include cases that were approved and then subsequently suspended or revoked because this action takes place after the original cases were closed, and including these cases would thus skew the results. Processing time represents the median number of calendar days between receipt of a case and the final action. Open cases are those cases that were received by DDTC but on which no final action has been taken. To obtain an overview of the data systems used to accept and process license cases at DDTC, we interviewed State officials responsible for information technology management. We assessed data reliability by obtaining and reviewing system documentation and performing electronic testing of data, and determined the data to be sufficiently reliable for our intended purposes. We also analyzed the data by type of license, commodities, countries, cases referred, cases in support of ongoing war efforts, exporters, and case final actions. To identify factors contributing to trends in processing times and open cases, we interviewed officials from DDTC, State bureaus to which cases are most frequently referred, the Department of Defense's (DOD) Defense Technology Security Administration (DTSA), and selected arms exporters. To understand the process of reviewing arms export cases referred from DDTC, we obtained and reviewed DDTC case review guidelines, applicable regulations, and laws. We compared DDTC procedures with DTSA case processing procedures. To determine the status of D-Trade, we obtained briefings and systems documentation and discussed problems with implementing the electronic processing system and future development plans with cognizant officials. We also compared processing times for D-Trade and paper processing by calculating processing times for permanent exports, which are processed through both systems. We obtained and analyzed data on DDTC funding and staffing levels. We also obtained and reviewed DDTC status reports used to monitor workload, processing times, and open cases. This appendix provides additional analyses of licensing data related to the composition of cases closed and case outcomes. Specifically, we analyzed the data in terms of types of cases, commodities, countries of destination, cases in support of ongoing war efforts, exporters, and case final actions. Of the 14 case types processed by DDTC, licenses for permanent exports made up the majority of cases. From fiscal year 2003 to 2006, the percentage of licenses for permanent exports increased from about 62 percent to over 66 percent of all cases, as shown in table 3. Processing times varied by type of case, as shown in table 4. For example, in fiscal year 2006, technical assistance agreements took a median of 94 days to process, while licenses for permanent exports, the most common case type, took 25 days, and amendments to existing licenses took 13 days to process. For cases involving permanent export licenses, aircraft and related components were the primary driver of increased cases, increasing about 44 percent, from about 9,800 in fiscal year 2003 to over 14,000 in fiscal year 2006, as shown in table 5. Processing times for permanent export licenses also varied by type of commodity group and were increasing for most commodities from fiscal years 2003 through 2006, with missile and spacecraft taking the longest to process. Several commodity groups saw reductions in processing times during the first 7 months of fiscal year 2007, including a significant reduction in missile and spacecraft. Processing times for aircraft increased during each period. Arms export cases are relatively concentrated by country of destination. As shown in table 6, in fiscal year 2006, cases identifying Japan and the United Kingdom as destination countries represented about 25 percent of all cases. Processing times, with the exception of those for Israel, are similar for the top countries of destination. DDTC has procedures to expedite cases submitted in support of ongoing war efforts including Operation Enduring Freedom (OEF) or Operation Iraqi Freedom (OIF). These cases did not represent a significant caseload---ranging from 0.8 percent to 1.5 percent from fiscal year 2003 through 2006. Median processing times for these cases ranged from 8 to 11 days, as shown in table 7. The number of exporters registered with DDTC that submitted cases increased about 13 percent, from almost 2,500 in fiscal year 2003 to almost 2,800 in fiscal year 2006. However, most exporters submitted relatively few applications, as shown in table 8. In contrast, some exporters submit thousands of applications in a given year. In terms of all cases received, the percentage of cases received from the top 10 exporters in terms of cases submitted ranged from about 19 to 26 percent, as shown in table 9. As shown in table 10, most cases processed by DDTC are approved or approved with condition, known as a proviso. Very few cases are denied. The number of cases returned without action increased from about 13 percent in fiscal year 2003 to over 17 percent in the first 7 months of fiscal year 2007. In addition to the contact named above, Anne-Marie Lasowski, Assistant Director; Bradley Terry; Peter Zwanzig; Jacqueline Wade; Arthur James, Jr.; Julia Kennon; Karen Sloan; and Alyssa Weir made key contributions to this report. Export Controls: Vulnerabilities and Inefficiencies Undermine System's Ability to Protect U.S. Interests. GAO-07-1135T. Washington, D.C.: July 26, 2007. High Risk Series: An Update. GAO-07-310. Washington, D.C.: January, 2007. Export Controls: Challenges Exist in Enforcement of an Inherently Complex System. GAO-07-265. Washington, D.C.: December 20, 2006. Defense Technologies: DOD's Critical Technologies Lists Rarely Inform Export Control and Other Policy Decisions. GAO-06-793. Washington, D.C.: July 28, 2006. Export Controls: Improvements to Commerce's Dual-Use System Needed to Ensure Protection of U.S. Interests in the Post-9/11 Environment. GAO-06-638. Washington, D.C.: June 26, 2006. Defense Trade: Arms Export Control Vulnerabilities and Inefficiencies in the Post-9/11 Security Environment. GAO-05-468R. Washington, D.C.: April 7, 2005. Defense Trade: Arms Export Control System in the Post-9/11 Environment. GAO-05-234. Washington, D.C.: February 16, 2005. Export Controls: Processes for Determining Proper Control of Defense- Related Items Need Improvement. GAO-02-996. Washington, D.C.: September 20, 2002. Export Controls: Department of Commerce Controls over Transfers of Technology to Foreign Nationals Need Improvement. GAO-02-972. Washington, D.C.: September 6, 2002. Export Controls: More Thorough Analysis Needed to Justify Changes in High Performance Computer Controls. GAO-02-892. Washington, D.C.: August 2, 2002. Defense Trade: Lessons to Be Learned from the Country Export Exemption. GAO-02-63. Washington, D.C.: March 29, 2002. Export Controls: Issues to Consider in Authorizing a New Export Administration Act. GAO-02-468T. Washington, D.C.: February 28, 2002. Export Controls: State and Commerce Department License Review Times Are Similar. GAO-01-528. Washington, D.C.: June 1, 2001. Export Controls: Reengineering Business Processes Can Improve Efficiency of State Department License Reviews. GAO-02-203. Washington, D.C.: December 31, 2001. Export Controls: System for Controlling Exports of High Performance Computing Is Ineffective. GAO-01-10. Washington, D.C.: December 18, 2000. Defense Trade: Analysis of Support for Recent Initiatives. GAO/NSIAD-00-191. Washington, D.C.: August 31, 2000. Defense Trade: Status of the Department of Defense's Initiatives on Defense Cooperation. GAO/NSIAD-00-190R. Washington, D.C.: July 19, 2000. Export Controls: Better Interagency Coordination Needed on Satellite Exports. GAO/NSIAD-99-182. Washington, D.C.: September 17, 1999. Export Controls: Some Controls over Missile-Related Technology Exports to China Are Weak. GAO/NSIAD-95-82. Washington, D.C.: April 17, 1995.
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To regulate the export of billions of dollars worth of arms to foreign governments and companies, the Department of State's (State) Directorate of Defense Trade Controls (DDTC) reviews and authorizes export licenses and other arms export cases. While such reviews require time to consider national security and foreign policy interests, the U.S. defense industry and some foreign government purchasers have expressed concern that the U.S. export control process is unnecessarily time-consuming. In 2005, GAO reported that processing times for arms export cases had increased despite State efforts to streamline its process. GAO was asked to (1) describe recent trends in the processing of arms export cases and (2) identify factors that have contributed to these trends. To conduct its work, GAO obtained and analyzed State arms export case data for fiscal year 2003 through April 30, 2007; reviewed relevant laws, regulations, and guidelines, as well as DDTC funding and staffing information; and interviewed State and Department of Defense officials and selected arms exporters. Three key trends indicate that DDTC's arms export licensing process is under stress. First, the number of arms export cases processed by DDTC increased 20 percent between fiscal years 2003 and 2006. Most of this increase was for licenses for permanent export. Second, during the same period, median processing times almost doubled. Third, the number of open arms export cases increased 50 percent from about 5,000 in October 2002 to about 7,500 in April 2007, with a high of more than 10,000 cases in September 2006. At the beginning of fiscal year 2007, DDTC launched a campaign to reduce the growing number of open cases. Through extraordinary measures--such as canceling staff training, meetings, and industry outreach, and pulling available staff from other duties to process cases--DDTC was able to cut the number of open cases by 40 percent in 3 months. However, such measures are not sustainable in the long term, do not address underlying inefficiencies and problems, and may have negative unintended consequences for the mission. While some blips in the trends can be attributed to onetime events or efforts--such as DDTC's campaign to reduce open cases--procedural inefficiencies, electronic processing system shortcomings, and human capital challenges underlie the overall trends. For example, GAO's analysis shows that DDTC is taking increasingly longer to refer cases to other agencies or State bureaus for additional review--from 7 days in fiscal year 2003 to 20 days during the first 7 months of fiscal year 2007. In addition, implementation of DDTC's electronic system for submitting applications has been problematic, and electronic processing has not been the promised panacea for improving processing times. DDTC does not perform systematic assessments to identify root causes of increased workload, processing times, and open cases and, in turn, develop sustainable solutions.
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An EHR is a digital version of a patient's paper medical record or chart. EHRs ideally make information available instantly and securely to authorized users. An EHR can contain the medical and treatment history of a patient, diagnoses, medications, treatment plans, immunization dates, allergies, radiology images, and laboratory and test results. An EHR can also give a provider access to evidence-based tools for making decisions about a patient's care and can automate certain workflows. EHR system software is typically purchased by providers (such as physicians, hospitals, and health systems) from vendors that develop the systems. When EHR systems are interoperable, information can be exchanged--sent from one provider to another--and then seamlessly integrated into the receiving provider's EHR system, allowing the provider to use that health information to inform clinical care. HHS and others view EHR system interoperability as a necessary step toward transforming health care into a system that can achieve goals of improved quality, efficiency, and patient safety. For example, use of interoperable EHR systems could better enable health care providers to view results from diagnostic procedures conducted by other providers to avoid duplication; evaluate test results and treatment outcomes over time regardless of where the care was provided to better understand a patient's medical history; share a basic set of patient information with specialists during referrals and receive updated information after the patient's visit with the specialist to improve care coordination; view complete medication lists to reduce the chance of duplicate therapy, drug interactions, medication abuse, and other adverse drug events; and identify important information, such as allergies or preexisting conditions, for unfamiliar patients during emergency treatment to reduce the risk of adverse events. Health data standards are technical requirements used to, among other things, facilitate health information exchange and interoperability of systems, including EHR systems. Such standards consist of terminology and technical specifications that, when adopted by multiple entities, facilitate the exchange and interoperability of health information. Health data standards include, for example, standardized language for prescriptions and laboratory testing. Standards define how information is packaged and communicated from one entity to another, setting the language, structure, and data types required for integration between the systems. Standards generally have been developed by nonfederal standard development organizations and are accompanied by implementation guides, which can help ensure that standards are implemented uniformly. Consistent implementation of the standards by the vendors that build and sell EHR systems and by providers who use these systems is necessary for interoperability. The Medicare and Medicaid EHR Incentive Programs are intended to help increase the adoption and meaningful use of EHRs by providing incentive payments for providers--that is, certain hospitals and health care professionals such as physicians--who participate in Medicare and Medicaid, and later imposing payment adjustments, also referred to as penalties, on those Medicare providers that do not meet meaningful use requirements for a program year. Within HHS, ONC and the Centers for Medicare & Medicaid Services (CMS) develop the programs' requirements. CMS establishes specific requirements providers must meet to qualify for incentive payments. Some of these requirements include the exchange of health information, which is a component of interoperability. ONC identifies health data standards and technical specifications for EHR systems and certifies EHR systems used by providers in the program to help ensure that providers implement a system that offers a minimum level of technological capability, functionality, and security. In order for an EHR system to be certified, it must adhere to requirements related to health information exchange, among other capabilities. The Health Insurance Portability and Accountability Act (HIPAA) of 1996 and its implementing regulations, the Privacy Rule, regulate covered providers' use and disclosure of personal health information. Providers may also be subject to additional state privacy rules, which can be more stringent than HIPAA requirements or standards. For example, states can set requirements around default practices for health information exchange. Specifically, states that require patients to "opt-in" to health information exchange do not allow the sharing of health information unless patients affirmatively consent to share health information. States with "opt-out" policies around health information exchange permit, by default, the automatic sharing of patient health information, and patients must affirmatively express their preference to not have information shared if they do not want it exchanged. The initiatives we reviewed vary in their efforts to achieve or facilitate interoperability, including (1) the primary products or services they offer (e.g., a network or guidance for implementing standards), (2) the types of electronic systems the initiatives are working to make interoperable, (3) the cost of the initiatives' products or services, (4) the geographic areas served by the initiatives, (5) the extent to which initiatives facilitate patient access to their health information, (6) the stakeholder groups that are members of the initiatives, and (7) the sources of funding for the initiatives. The majority of the initiatives we selected are works in progress, meaning that they are relatively new and therefore still in the process of developing, or encouraging others to adopt, their products or services. Of the 18 initiatives we selected, 10 began after January 2013. Representatives from 6 of the initiatives said that their primary products or services were available in some areas or available on a limited scale; however, according to the representatives, none of their products or services were widely available or widely used at the time of our review. For example, representatives from the 4 initiatives associated with HIE organizations said that they are actively facilitating interoperability, but this interoperability is confined to a single state or region. The 2 other initiatives have products available, but according to representatives, the initiatives are in the very early stages of deploying those products and anticipate that use of their products will increase by 2016. Representatives from 7 of the initiatives stated that their products or services are currently being developed and would not be available until the end of 2015 or sometime in 2016. Stakeholders and initiative representatives we interviewed described five key challenges to EHR interoperability, and initiative representatives described how they are working to address these challenges using different approaches. Initiative representatives also identified other issues beyond the scope of their initiatives that they say need to be addressed in order to move nationwide EHR interoperability forward. Stakeholders and representatives from the selected EHR initiatives described five key challenges to achieving EHR interoperability: (1) insufficiencies in standards for EHR interoperability, (2) variation in state privacy rules, (3) accurately matching patients' health records, (4) costs associated with interoperability, and (5) need for governance and trust among entities. While standards for electronically exchanging information among EHR systems exist, stakeholders and initiative representatives said that these standards are not sufficient for achieving EHR interoperability. This challenge stems from the fact that some standards are not specific enough and, as a result, the systems that implement these standards may not be interoperable. According to some stakeholders, some standards allow EHR systems to use different formats and terminology when exchanging data. However, this resulting variability prevents the receiving system from processing the information and properly integrating it into the patient record; in other words, the systems are not interoperable. Information that is electronically exchanged from one provider to another must adhere to the same standards, and these standards must be implemented uniformly, in order for the information to be interpreted and used in EHRs, thereby enabling interoperability. Stakeholders and initiative representatives said that exchanging health information with providers in other states, which is necessary for nationwide EHR interoperability, can be difficult. This challenge exists because of variations in privacy rules from state to state, especially variation in laws pertaining to patient consent for sharing health information. According to a representative from one initiative, providers in opt-in states may be hesitant to exchange health information with providers in opt-out states if the providers lack assurance that the patients have explicitly consented to the exchange. This challenge may be more pronounced when exchanging certain types of sensitive information, such as mental health information or HIV status, among providers in different states. Some states require additional patient consent when exchanging such information. A representative from one initiative explained that current digital methods for exchange do not provide assurance that sensitive information is protected in accordance with privacy rules. According to this initiative representative, the sensitive information that is subject to more stringent privacy rules could be inadvertently aggregated with other health information and exchanged without the patient's consent, thereby violating privacy rules. Representatives from one initiative noted that they specifically do not include any mental health information in electronic health information exchange, even with patient consent, because of concerns about inadvertently violating privacy rules. Stakeholders and initiative representatives said that another key challenge to EHR interoperability is accurately matching patients' health records that are stored in different systems. This challenge exists because many EHR systems use demographic information, such as a patient's name and date of birth, to match different health records for a given patient held by different providers. As we previously reported, demographic variables do not always yield accurate results because, for example, there could be more than one patient with the same information. In addition, providers may not collect and use the same demographic variables for matching. For example, one initiative representative explained that a recent effort to achieve interoperability with another organization stalled because the other organization relies on a patient's social security number for patient matching, but the initiative does not collect social security numbers for its patients. In addition, some methods to match records for the same patient across providers can fail because of differences across EHR systems in data formats or because of missing data from or inaccurate data in some health records. Stakeholders and initiative representatives said that the costs associated with achieving interoperability can be prohibitive for providers. This challenge exists in part because of the high cost of EHR customization and legal fees associated with interoperability. One stakeholder said that many EHR systems require multiple customized interfaces--which are specially designed connections to other health IT systems--in order to facilitate interoperability with other providers and organizations. The costs associated with these customized interfaces are typically paid by the EHR buyers (i.e., providers). Representatives from some initiatives added that the legal fees associated with establishing EHR interoperability can also be significant. For example, as the next section describes, certain agreements may need to be established as a precondition to interoperability. Stakeholders and initiative representatives said that it can be challenging to establish the governance and trust among entities that are needed to achieve interoperability. These governance practices can include organizational policies related to privacy, information security, data use, technical standards, and other issues that affect the exchange of information across organizational boundaries. One stakeholder noted that it is important to establish agreements to ensure that entities share information openly with all other participants in a network. However, representatives from one initiative noted that there is some risk that the various agreements developed by different EHR initiatives could result in conflicting organizational policies. For example, the representative explained that participants in one initiative cannot participate in another initiative because the initiatives' organizational privacy policies do not align. Representatives from all 18 of the initiatives we reviewed said they are working to address these key challenges using different approaches (see table 1). Fifteen of the 18 initiatives are working to address insufficient standards needed to achieve EHR interoperability. Representatives from 7 of the 15 initiatives told us that they are developing instructions for implementing standards in ways that enhance interoperability. For example, 1 initiative provides precise definitions of how different standards can be implemented to meet specific clinical needs, such as locating information about a patient that is contained in other organizations' EHR systems. This initiative also provides an opportunity for vendors to test that they have successfully incorporated these instructions into their products. Four of these 7 initiatives are working to develop instructions for implementing existing standards, and 3 are working to develop instructions for implementing a new standard that representatives said will improve systems' ability to interoperate. Representatives from 8 of the 15 initiatives told us that they require organizations to adopt common technical requirements as a condition of participation in the initiative. For example, representatives from 1 initiative said that it requires participants to adopt specific implementations of standards that enable functions like sharing health care information between entities. Representatives from 5 of the 8 initiatives told us that they also require participants to test their systems to confirm that the systems are able to interoperate with the systems of other initiative participants. For example, 1 initiative provides an online testing tool that vendors and providers must use to assess and demonstrate interoperability before joining the initiative. In addition to requiring agreement on technical requirements, 2 of the 8 initiatives said that they provide semantic normalization--that is, translation of data between different formats and terminology--in order to accommodate variation between organizations exchanging information and enable interoperability. One initiative representative predicted that there will always be a need for some semantic normalization as part of interoperability because it is unlikely that all organizations will adopt the same standards in exactly the same way. Representatives from initiatives expressed differing opinions on additional actions that are needed to fully address the challenge of insufficient standards, including the role of the federal government in addressing the issue. Representatives from three initiatives said that there is a need for federal leadership on standards and their implementation. Conversely, representatives from two initiatives said that current federal work on standards duplicates existing private sector efforts, and representatives from a third initiative expressed concern that the government is not flexible enough to account for changing technologies and should therefore leave this issue to the private sector. Representatives from three initiatives we spoke with said that standards should be tested through pilots before they are incorporated into national requirements, and suggested that this testing of standards could be an appropriate role for the federal government. Eleven of the 18 initiatives we selected are working to address the challenges encountered because of variation in state privacy rules. Representatives from 6 of these 11 initiatives said that their initiatives are working to improve providers' ability to obtain and track patient consent and other patient preferences electronically. This is important because some state privacy rules require affirmative patient consent to enable exchange. Three of these 6 initiatives are focused on improving patients' ability to document their consent to exchange and grant access to their personal health information. For example, 1 initiative is developing a framework that allows patients to document digitally whether they consent to information sharing and to incorporate this documentation in providers' health IT systems. Another initiative is working to enable patient control of their information through patient-mediated exchange, which allows patients to aggregate their health records into a PHR and electronically grant providers access to these records according to the patient's preferences. Three other initiatives told us that they are using or plan to develop technology that allows providers to share only portions of a patient's health record, which would allow providers to ensure that they send only information that they are authorized to share. Representatives from 5 of the 11 initiatives told us that their initiative incorporated specific privacy policies into agreements signed by participants, including policies governing patient consent and access to their health records. For example, 1 nationwide initiative requires participants to obtain affirmative consent from patients before their information can be exchanged using the initiative's product. Representatives from several initiatives identified additional actions that are needed to fully address this challenge. Specifically, six representatives said that education on or federal guidance about the application of privacy laws and liability issues would reduce confusion and increase willingness to exchange information across state lines. Representatives from one initiative noted that the difference between states that require patients to affirmatively consent to sharing some or all of their medical information and states that do not have this requirement is a significant barrier to interoperability, though representatives from another initiative said that this difference is less of an issue if providers are educated in the laws of their state. Thirteen of the 18 initiatives are working to address the challenge of accurately matching patients' health records. Representatives from 4 of the 13 initiatives said that their initiatives are working to improve the quality of the data or types of information used for matching patients' health records. For example, 2 initiatives are working to establish standard data formats for health IT systems, which may reduce differences in demographic data for the same patient, thus improving the accuracy of matching. Representatives from 2 other initiatives told us that their initiative is working to create a list of patient attributes (e.g., telephone number and address) that can be combined to establish a patient's identity with high success and enable providers and others to match patient records as accurately as possible. Representatives from 7 of the 13 initiatives told us that they require their participants to use a standardized method for patient matching or are working to develop standardized methods. For example, 1 initiative requires that all participants incorporate the same patient-matching method into their EHR systems. Representatives from 2 other initiatives said that their initiative is working to reconcile variations in the data elements and formats used for patient matching by network participants, with the goal of adopting a single shared method among all participants. Representatives from another initiative told us that the initiative is working to develop a tool for matching patients to their records that can be incorporated directly into EHR systems. Notably, 2 of the initiatives that are working on patient-matching methods said that they rely on patients to confirm that the match is accurate at the site-of-care. Representatives from 1 of these initiatives noted that this approach may not be practical in circumstances or settings in which information is required immediately or the patient is unresponsive. Representatives from 2 of the 13 initiatives said that they are working to enable patient-mediated exchange, which involves allowing patients to aggregate their health information in a PHR. One representative noted that patients are likely to notice if their PHR contains information that is incorrectly matched and to correct the error. Representatives from five initiatives noted that a national patient identifier, which HHS identifies as currently prohibited under law, is needed to fully address this challenge. Sixteen of the 18 initiatives are working to address the challenge of the reported high costs associated with interoperability. Some of these initiatives are working to address this challenge using multiple approaches. Representatives from 10 initiatives that said they are addressing this challenge by reducing the need to customize EHR systems to connect with other systems. For example, representatives from 1 initiative explained that participants must adopt standard features that should reduce the amount of customization needed to connect with other systems. Representatives from 3 initiatives explained that they give participants the opportunity to reduce the cost of interoperability by paying for only one interface to connect with all the entities participating in the initiative, instead of paying for individual connections to each entity. Officials from 3 other initiatives told us that they are focused on creating APIs--programming instructions that allow systems to extract data from other systems that adopt the same API--that they said would nearly eliminate the need to customize systems that adopt the API, or are working to leverage APIs to create applications that can be easily added to EHR systems to exchange and analyze interoperable data. Representatives from 12 initiatives said that their initiatives' products are or will be available at no cost or at a reasonable cost to providers or vendors. For example, representatives from 4 initiatives told us that the profiles and specifications they are developing will be available free of charge for vendors and providers to incorporate into EHR systems. Representatives from 6 other initiatives said that they are attempting to keep the cost of participation in the initiative reasonable. For example, representatives from 1 initiative said that they adjust their fees for different provider types to accommodate differences in the providers' data exchange needs, thus increasing the likelihood that providers can afford to participate. Representatives from three initiatives explained that they are working to address the cost issue by creating standardized legal agreements to govern information sharing, which can be easily adapted by initiative participants and reduce the need for legal services and the accompanying legal fees. Eleven of the 18 initiatives are working to establish governance and trust among the entities that seek to exchange interoperable health information. Representatives from 7 of the 11 initiatives are fulfilling the need for governance and trust among entities by establishing standard legal agreements that their participants adopt and use to govern relationships within the initiative. For example, 1 initiative crafted a publically available agreement that includes provisions related to security and authentication policies, as well as a requirement that all participants share patient health information openly with all other participants that are authorized to receive this information. Another initiative has created a committee to evaluate specific ways that the data contained in the network may be used and incorporates these decisions into its agreement. Another initiative deliberately designed its agreement so that participants can also adopt existing national agreements; a representative from this initiative noted that if there was a situation in which their agreement conflicted with another initiative's requirements, the initiative would work to reconcile the conflicting requirements so its participants could participate in both initiatives whenever possible. Representatives from 4 of the 11 initiatives told us that they are working to address this challenge by fostering consensus and harmonization of policies and business practices across entities and organizations. For example, 1 initiative facilitates consensus among different stakeholders about methods to enable interoperability for certain uses, and releases the results of these discussions publically for other entities to incorporate into their agreements, policies, and practices. In addition to the five challenges identified by stakeholders and initiative representatives, representatives identified two other issues that need to be addressed in order to move nationwide interoperability forward. EHR interoperability would move forward once providers saw a value in their systems becoming interoperable. Six initiative representatives said that improvements to EHR systems--such as enhancements that improve providers' workflow or clinical decision-making--are needed to increase the extent to which an EHR system, and the information contained within it, is a valuable tool for health care providers. Six initiative representatives noted that reforms that tie payment to quality of care rather than number of services provided will incentivize sharing of information across providers to improve efficiency. Changes to CMS's Medicare and Medicaid EHR Incentive Programs would also help move nationwide interoperability forward. While 8 initiative representatives we spoke with told us that the EHR Incentive Programs have increased adoption of EHRs, representatives from 5 initiatives suggested pausing or stopping the programs. Representatives from 10 of the initiatives noted that efforts to meet the programs' requirements divert resources and attention from other efforts to enable interoperability. For example, some initiative representatives explained that the EHR programs' criteria require EHR vendors to incorporate messaging capabilities into EHR systems, but this capability generally does not enable interoperability at this time. Representatives from 10 of the initiatives said that the criteria currently used to certify EHR systems under the EHR Incentive Programs are not sufficient for achieving interoperability, and representatives from 3 initiatives suggested amending the criteria to focus on testing systems' ability to interoperate. We provided a draft of this report to HHS for comment. HHS 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, the National Coordinator for Health Information Technology, 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 staffs have any questions about this report, please contact me at (202) 512-7114 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. Other major contributors to this report are listed in appendix II. We identified nonfederal organizations that have ongoing initiatives that are working to facilitate electronic health record (EHR) interoperability. The 18 initiatives we selected for our work are listed below. California Association of Health Information Exchanges (CAHIE) Center for Medical Interoperability (C4MI) ConCert by Healthcare Information and Management Systems Society (HIMSS) eHealth Initiative (eHI) Electronic Healthcare Network Accreditation Commission (EHNAC) Healthcare Services Platform Consortium (HSPC) Identity Ecosystem Steering Group (IDESG) Healthcare Committee Integrating the Healthcare Enterprise (IHE) USA Kansas Health Information Network (KHIN) National Association for Trusted Exchange (NATE) Open ID Health Relationship Trust (HEART) Working Group Statewide Health Information Network of New York (SHIN-NY) Substitutable Medical Applications and Reusable Technologies (SMART) on Fast Healthcare Interoperability Resources (FHIR) In addition to the contact named above, Tom Conahan, Assistant Director; A. Elizabeth Dobrenz; Krister Friday; Monica Perez-Nelson; and Andrea E. Richardson made key contributions to this report.
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EHR interoperability is viewed by many health care stakeholders as a necessary step toward improving health care. However, interoperability has remained limited. Although the federal government plays a key role in guiding movement toward interoperability, many of the actions are to be completed by nonfederal stakeholders. GAO was asked to review the status of efforts by entities other than the federal government to develop infrastructure that could lead to nationwide interoperability of health information. This report describes the (1) characteristics of selected nonfederal initiatives intended to facilitate EHR interoperability, and (2) key challenges related to EHR interoperability and the extent to which selected nonfederal initiatives are addressing these challenges. GAO interviewed representatives from 18 selected nonfederal initiatives that were frequently mentioned by stakeholders GAO interviewed, and reflected a range of approaches. GAO reviewed documents from these initiatives as well as other published research. Representatives from the 18 nonfederal initiatives GAO reviewed described a variety of efforts they are undertaking to achieve or facilitate electronic health record (EHR) interoperability, but most of these initiatives remain works in progress. EHR interoperability is the ability of systems to exchange electronic health information with other systems and process the information without special effort by the user, such as a health care provider. These initiatives' efforts include creating guidance related to health data standards, encouraging the adoption of certain health data standards or policies that facilitate interoperability, and operating networks that connect EHR systems to enable interoperability. The initiatives varied in a number of other ways, including the types of electronic systems the initiatives are working to make interoperable, the cost of their products or services, the geographic area served, patient use of the products or services, and their organizational structures. For example, GAO found that while some initiatives are making their products or services available at no cost, others are charging a fee for their products or services based on the type of entity using the product or service (e.g., individual physician or hospital) or the amount of data exchanged. Similarly, over half of the initiatives were using varying approaches to facilitate patient access to and control over their health information. The majority of the initiatives GAO selected are still in the process of developing, or encouraging others to adopt, their products or services. Most of the initiatives' products or services were not widely available at the time of GAO's review, but initiative representatives anticipated greater availability of their products or services in the next 2 years. Stakeholders and initiative representatives GAO interviewed described five key challenges to achieving EHR interoperability, which are consistent with challenges described in past GAO work. Specifically, the challenges they described are (1) insufficiencies in health data standards, (2) variation in state privacy rules, (3) accurately matching patients' health records, (4) costs associated with interoperability, and (5) the need for governance and trust among entities, such as agreements to facilitate the sharing of information among all participants in an initiative. Representatives from the 18 initiatives GAO reviewed said they are working to address these key challenges using different approaches. Each key challenge is in the process of being addressed by some initiatives. To move interoperability forward, initiative representatives noted, among other issues, that providers need to see an EHR system as a valuable tool for improving clinical care. The Department of Health and Human Services provided technical comments on a draft of this report, which GAO incorporated as appropriate.
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Intellectual property is an important component of the U.S. economy, and the United States is an acknowledged global leader in the creation of intellectual property. However, industries estimate that annual losses stemming from violations of intellectual property rights overseas are substantial. Further, counterfeiting of products such as pharmaceuticals and food items fuels public health and safety concerns. USTR's Special 301 reports on the adequacy and effectiveness of intellectual property protection around the world demonstrate that, from a U.S. perspective, intellectual property protection is weak in developed as well as developing countries and that the willingness of countries to address intellectual property issues varies greatly. Eight federal agencies, as well as the Federal Bureau of Investigation (FBI) and the U.S. Patent and Trademark Office (USPTO), undertake the primary U.S. government activities to protect and enforce U.S. intellectual property rights overseas. The agencies are the Departments of Commerce, State, Justice, and Homeland Security; USTR; the Copyright Office; the U.S. Agency for International Development (USAID); and the U.S. International Trade Commission. The efforts of U.S. agencies to protect U.S. intellectual property overseas fall into three general categories--policy initiatives, training and technical assistance, and U.S. law enforcement actions. U.S. policy initiatives to increase intellectual property protection around the world are primarily led by USTR, in coordination with the Departments of State and Commerce, USPTO, and the Copyright Office, among other agencies. A centerpiece of policy activities is the annual Special 301 process. "Special 301" refers to certain provisions of the Trade Act of 1974, as amended, that require USTR to annually identify foreign countries that deny adequate and effective protection of intellectual property rights or fair and equitable market access for U.S. persons who rely on intellectual property protection. USTR identifies these countries with substantial assistance from industry and U.S. agencies and publishes the results of its reviews in an annual report. Once a pool of such countries has been determined, the USTR, in coordination with other agencies, is required to decide which, if any, of these countries should be designated as a Priority Foreign Country (PFC). If a trading partner is identified as a PFC, USTR must decide within 30 days whether to initiate an investigation of those acts, policies, and practices that were the basis for identifying the country as a PFC. Such an investigation can lead to actions such as negotiating separate intellectual property understandings or agreements between the United States and the PFC or implementing trade sanctions against the PFC if no satisfactory outcome is reached. Between 1994 and 2004, the U.S. government designated three countries as PFCs--China, Paraguay, and Ukraine--as a result of intellectual property reviews. The U.S. government negotiated separate bilateral intellectual property agreements with China and Paraguay to address IPR problems. These agreements are subject to annual monitoring, with progress cited in each year's Special 301 report. Ukraine, where optical media piracy was prevalent, was designated a PFC in 2001. The United States and Ukraine found no mutual solution to the IPR problems, and in January 2002, the U.S. government imposed trade sanctions in the form of prohibitive tariffs (100 percent) aimed at stopping $75 million worth of certain imports from Ukraine over time. In addition, most of the agencies involved in efforts to promote or protect IPR overseas engage in some training or technical assistance activities. Key activities to develop and promote enhanced IPR protection in foreign countries are undertaken by the Departments of Commerce, Homeland Security, Justice, and State; the FBI; USPTO; the Copyright Office; and USAID. Training events sponsored by U.S. agencies to promote the enforcement of intellectual property rights have included enforcement programs for foreign police and customs officials, workshops on legal reform, and joint government-industry events. According to a State Department official, U.S. government agencies have conducted intellectual property training for a number of countries concerning bilateral and multilateral intellectual property commitments, including enforcement, during the past few years. For example, intellectual property training was conducted by numerous agencies over the last year in Poland, China, Morocco, Italy, Jordan, Turkey, and Mexico. A small number of agencies are involved in enforcing U.S. intellectual property laws, and the nature of these activities differs from other U.S. government actions related to intellectual property protection. Working in an environment where counterterrorism is the central priority, the FBI and the Departments of Justice and Homeland Security take actions that include engaging in multicountry investigations involving intellectual property violations and seizing goods that violate intellectual property rights at U.S. ports of entry. For example, the Department of Justice has an office that directly addresses international IPR problems. Justice has been involved with international investigation and prosecution efforts and, according to a Justice official, has become more aggressive in recent years. For instance, Justice and the FBI recently coordinated an undercover IPR investigation, with the involvement of several foreign law enforcement agencies. The investigation focused on individuals and organizations, known as "warez" release groups, which specialize in the Internet distribution of pirated materials. In April 2004, these investigations resulted in 120 simultaneous searches worldwide (80 in the United States) by law enforcement entities from 10 foreign countries and the United States in an effort known as "Operation Fastlink." Although investigations can result in international actions such as those cited above, FBI officials told us that they cannot determine the number of past or present IPR cases with an international component because they do not track or categorize cases according to this factor. Department of Homeland Security (DHS) officials emphasized that their investigations include an international component when counterfeit goods are brought into the United States. However, DHS does not track cases by a specific foreign connection. The overall number of IPR-oriented investigations that have been pursued by foreign authorities as a result of DHS efforts is unknown. DHS does track seizures of goods that violate IPR and reports seizures that totaled more than $90 million in fiscal year 2003. Seizures of IPR-infringing goods have involved imports primarily from Asia. In fiscal year 2003, goods from China accounted for about two-thirds of the value of all IPR seizures, many of which were shipments of cigarettes. Other seized goods from Asia that year originated in Hong Kong and Korea. A DHS official pointed out that providing protection against IPR-infringing imported goods for some U.S. companies--particularly entertainment companies-- can be difficult, because companies often fail to record their trademarks and copyrights with DHS. Several interagency mechanisms exist to coordinate overseas intellectual property policy initiatives, development and assistance activities, and law enforcement efforts, although these mechanisms' level of activity and usefulness varies. According to government and industry officials, an interagency trade policy mechanism established by the Congress in 1962 to assist USTR has operated effectively in reviewing IPR issues. The mechanism, which consists of tiers of committees as well as numerous subcommittees, constitutes the principle means for developing and coordinating U.S. government positions on international trade, including IPR. A specialized subcommittee is central to conducting the Special 301 review and determining the results of the review. This interagency process is rigorous and effective, according to U.S. government and industry officials. A Commerce official told us that the Special 301 review is one of the best tools for interagency coordination in the government, while a Copyright Office official noted that coordination during the review is frequent and effective. A representative for copyright industries also told us that the process works well and is a solid interagency effort. The National Intellectual Property Law Enforcement Coordination Council (NIPLECC), created by the Congress in 1999 to coordinate domestic and international intellectual property law enforcement among U.S. federal and foreign entities, seems to have had little impact. NIPLECC consists of (1) the Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office; (2) the Assistant Attorney General, Criminal Division; (3) the Under Secretary of State for Economic and Agricultural Affairs; (4) the Deputy United States Trade Representative; (5) the Commissioner of Customs; and (6) the Under Secretary of Commerce for International Trade. NIPLECC's authorizing legislation did not include the FBI as a member of NIPLECC, despite its pivotal role in law enforcement. However, according to representatives of the FBI, USPTO, and Justice, the FBI should be a member. USPTO and Justice cochair NIPLECC, which has no independent staff or budget. In the council's nearly 4 years of existence, its primary output has been three annual reports to the Congress, which are required by statute. According to interviews with industry officials and officials from its member agencies, and as evidenced by its own legislation and reports, NIPLECC continues to struggle to define its purpose and has had little discernable impact. Indeed, officials from more than half of the member agencies offered criticisms of NIPLECC, remarking that it is unfocused, ineffective, and "unwieldy." In official comments to the council's 2003 annual report, major IPR industry associations expressed a sense that NIPLECC is not undertaking any independent activities or effecting any impact. One industry association representative stated that law enforcement needs to be made more central to U.S. IPR efforts and said that although he believes the council was created to deal with this issue, it has "totally failed." The lack of communication regarding enforcement results in part from complications such as concerns regarding the sharing of sensitive law enforcement information and from the different missions of the various agencies involved in intellectual property actions overseas. According to an official from USPTO, NIPLECC is hampered primarily by its lack of independent staff and funding. According to a USTR official, NIPLECC needs to define a clear role in coordinating government policy. A Justice official stressed that, when considering coordination, it is important to avoid creating an additional layer of bureaucracy that may detract from efforts devoted to each agency's primary mission. Despite its difficulties thus far, we heard some positive comments regarding NIPLECC. For example, an official from USPTO noted that the IPR training database Web site resulted from NIPLECC efforts. Further, an official from the State Department commented that NIPLECC has had some "trickle-down" effects, such as helping to prioritize the funding and development of the intellectual property database at the State Department. Although the agency officials that constitute NIPLECC's membership meet infrequently and NIPLECC has undertaken few concrete activities, this official noted that NIPLECC provides the only forum for bringing enforcement, policy, and foreign affairs agencies together at a high level to discuss intellectual property issues. A USPTO official stated that NIPLECC has potential but needs to be "energized." Other coordination mechanisms include the National International Property Rights Coordination Center (IPR Center) and informal coordination. The IPR Center in Washington, D.C., a joint effort between DHS and the FBI, began limited operations in 2000. According to a DHS official, the coordination between DHS, the FBI, and industry and trade associations makes the IPR Center unique. The IPR Center is intended to serve as a focal point for the collection of intelligence involving copyright and trademark infringement, signal theft, and theft of trade secrets. However, the center is not widely used by industry. An FBI official associated with the IPR Center estimated that about 10 percent of all FBI industry referrals come through the center rather than going directly to FBI field offices. DHS officials noted that "industry is not knocking the door down" and that the IPR Center is perceived as underutilized. Policy agency officials noted the importance of informal but regular communication among staff at the various agencies involved in the promotion or protection of intellectual property overseas. Several officials at various policy-oriented agencies, such as USTR and the Department of Commerce, noted that the intellectual property community was small and that all involved were very familiar with the relevant policy officials at other agencies in Washington, D.C. Further, State Department officials at U.S. embassies regularly communicate with agencies in Washington, D.C., regarding IPR matters and U.S. government actions. Agency officials noted that this type of coordination is central to pursuing U.S. intellectual property goals overseas. Although communication between policy and law enforcement agencies can occur through forums such as the NIPLECC, these agencies do not systematically share specific information about law enforcement activities. According to an FBI official, once a criminal investigation begins, case information stays within the law enforcement agencies and is not shared. A Justice official emphasized that criminal law enforcement is fundamentally different from the activities of policy agencies and that restrictions exist on Justice's ability to share investigative information, even with other U.S. agencies. U.S. efforts have contributed to strengthened foreign IPR laws, but enforcement overseas remains weak. The impact of U.S. activities is challenged by numerous factors. Industry representatives report that the situation may be worsening overall for some intellectual property sectors. The efforts of U.S. agencies have contributed to the establishment of strengthened intellectual property legislation in many foreign countries, however, the enforcement of intellectual property rights remains weak in many countries, and U.S. government and industry sources note that improving enforcement overseas is now a key priority. USTR's most recent Special 301 report states that "although several countries have taken positive steps to improve their IPR regimes, the lack of IPR protection and enforcement continues to be a global problem." For example, although the Chinese government has improved its statutory IPR regime, USTR remains concerned about enforcement in that country. According to USTR, counterfeiting and piracy remain rampant in China and increasing amounts of counterfeit and pirated products are being exported from China. Although U.S. law enforcement does undertake international cooperative activities to enforce intellectual property rights overseas, executing these efforts can prove difficult. For example, according to DHS and Justice officials, U.S. efforts to investigate IPR violations overseas are complicated by a lack of jurisdiction as well as by the fact that U.S. officials must convince foreign officials to take action. Further, a DHS official noted that in some cases, activities defined as criminal in the United States are not viewed as an infringement by other countries and that U.S. law enforcement agencies can therefore do nothing. In addition, U.S. efforts confront numerous challenges. Because intellectual property protection is one of many U.S. government objectives pursued overseas, it is viewed internally in the context of broader U.S. foreign policy objectives that may receive higher priority at certain times in certain countries. Industry officials with whom we met noted, for example, their belief that policy priorities related to national security were limiting the extent to which the United States undertook activities or applied diplomatic pressure related to IPR issues in some countries. Further, the impact of U.S. activities is affected by a country's own domestic policy objectives and economic interests, which may complement or conflict with U.S. objectives. U.S. efforts are more likely to be effective in encouraging government action or achieving impact in a foreign country where support for intellectual property protection exists. It is difficult for the U.S. government to achieve impact in locations where foreign governments lack the "political will" to enact IPR protections. Many economic factors complicate and challenge U.S. and foreign governments' efforts, even in countries with the political will to protect intellectual property. These factors include low barriers to entering the counterfeiting and piracy business and potentially high profits for producers. In addition, the low prices of counterfeit products are attractive to consumers. The economic incentives can be especially acute in countries where people have limited income. Technological advances allowing for high-quality inexpensive and accessible reproduction and distribution in some industries have exacerbated the problem. Moreover, many government and industry officials believe that the chances of getting caught for counterfeiting and piracy, as well as the penalties when caught, are too low. The increasing involvement of organized crime in the production and distribution of pirated products further complicates enforcement efforts. Federal and foreign law enforcement officials have linked intellectual property crime to national and transnational organized criminal operations. Further, like other criminals, terrorists can trade any commodity in an illegal fashion, as evidenced by their reported involvement in trading a variety of counterfeit and other goods. Many of these challenges are evident in the optical media industry, which includes music, movies, software, and games. Even in countries where interests exist to protect domestic industries, such as the domestic music industry in Brazil or the domestic movie industry in China, economic and law enforcement challenges can be difficult to overcome. For example, the cost of reproduction technology and copying digital media is low, making piracy an attractive employment opportunity, especially in a country where formal employment is hard to obtain. The huge price differentials between pirated CDs and legitimate copies also create incentives on the consumer side. For example, when we visited a market in Brazil, we observed that the price for a legitimate DVD was approximately ten times the price for a pirated DVD. Even if consumers are willing to pay extra to purchase the legitimate product, they may not do so if the price differences are too great for similar products. Further, the potentially high profit makes optical media piracy an attractive venture for organized criminal groups. Industry and government officials have noted criminal involvement in optical media piracy and the resulting law enforcement challenges. Recent technological advances have also exacerbated optical media piracy. The mobility of the equipment makes it easy to transport it to another location, further complicating enforcement efforts. Likewise, the Internet provides a means to transmit and sell illegal software or music on a global scale. According to an industry representative, the ability of Internet pirates to hide their identities or operate from remote jurisdictions often makes it difficult for IPR holders to find them and hold them accountable. Despite improvements such as strengthened foreign IPR legislation, international IPR protection may be worsening overall for some intellectual property sectors. For example, according to copyright industry estimates, losses due to piracy grew markedly in recent years. The entertainment and business software sectors, for example, which are very supportive of USTR and other agencies, face an environment in which their optical media products are increasingly easy to reproduce, and digitized products can be distributed around the world quickly and easily via the Internet. According to an intellectual property association representative, counterfeiting trademarks has also become more pervasive in recent years. Counterfeiting affects more than just luxury goods; it also affects various industrial goods. The U.S. government has demonstrated a commitment to addressing IPR issues in foreign countries using multiple agencies. However, law enforcement actions are more restricted than other U.S. activities, owing to factors such as a lack of jurisdiction overseas to enforce U.S. law. Several IPR coordination mechanisms exist, with the interagency coordination that occurs during the Special 301 process standing out as the most significant and active. Conversely, the mechanism for coordinating intellectual property law enforcement, NIPLECC, has accomplished little that is concrete. Currently, there is a lack of compelling information to demonstrate a unique role for this group, bringing into question its effectiveness. In addition, it does not include the FBI, a primary law enforcement agency. Members, including NIPLECC leadership, have repeatedly acknowledged that the group continues to struggle to find an appropriate mission. The effects of U.S. actions are most evident in strengthened foreign IPR legislation. U.S. efforts are now focused on enforcement, since effective enforcement is often the weak link in intellectual property protection overseas and the situation may be deteriorating for some industries. As agencies continue to pursue IPR improvements overseas, they will face daunting challenges. These challenges include the need to create political will overseas, recent technological advancements that facilitate the production and distribution of counterfeit and pirated goods, and powerful economic incentives for both producers and consumers, particularly in developing countries. Further, as the U.S. government focuses increasingly on enforcement, it will face different and complex factors, such as organized crime, that may prove quite difficult to address. With a broad mandate under its authorizing legislation, NIPLECC has struggled to establish its purpose and unique role. If the Congress wishes to maintain NIPLECC and take action to increase its effectiveness, the Congress may wish to consider reviewing the council's authority, operating structure, membership, and mission. Such considerations could help NIPLECC identify appropriate activities and operate more effectively to coordinate intellectual property law enforcement issues. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the committee may have at this time. Should you have any questions about this testimony, please contact me by e-mail at [email protected] or Emil Friberg at [email protected]. We can also be reached at (202) 512-4128 and (202) 512-8990, respectively. Other major contributors to this testimony were Leslie Holen, Ming Chen, and Sharla Draemel. 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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Although the U.S. government provides broad protection for intellectual property, intellectual property protection in parts of the world is inadequate. As a result, U.S. goods are subject to piracy and counterfeiting in many countries. A number of U.S. agencies are engaged in efforts to improve protection of U.S. intellectual property abroad. This testimony, based on a recent GAO report, describes U.S agencies' efforts, the mechanisms used to coordinate these efforts, and the impact of these efforts and the challenges they face. U.S. agencies undertake policy initiatives, training and assistance activities, and law enforcement actions in an effort to improve protection of U.S. intellectual property abroad. Policy initiatives include assessing global intellectual property challenges and identifying countries with the most significant problems--an annual interagency process known as the "Special 301" review--and negotiating agreements that address intellectual property. In addition, many agencies engage in training and assistance activities, such as providing training for foreign officials. Finally, a small number of agencies carry out law enforcement actions, such as criminal investigations involving foreign parties and seizures of counterfeit merchandise. Agencies use several mechanisms to coordinate their efforts, although the mechanisms' usefulness varies. Formal interagency meetings--part of the U.S. government's annual Special 301 review--allow agencies to discuss intellectual property policy concerns and are seen by government and industry sources as rigorous and effective. However, the National Intellectual Property Law Enforcement Coordination Council, established to coordinate domestic and international intellectual property law enforcement, has struggled to find a clear mission, has undertaken few activities, and is generally viewed as having little impact. U.S. efforts have contributed to strengthened intellectual property legislation overseas, but enforcement in many countries remains weak, and further U.S. efforts face significant challenges. For example, competing U.S. policy objectives take precedence over protecting intellectual property in certain regions. Further, other countries' domestic policy objectives can affect their "political will" to address U.S. concerns. Finally, many economic factors, as well as the involvement of organized crime, hinder U.S. and foreign governments' efforts to protect U.S. intellectual property abroad.
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According to GSA, its Federal Technology Service, in conjunction with the IMC, is responsible for ensuring that federal agencies have access to the telecommunications services and solutions needed to meet mission requirements. Its current program to provide long- distance telecommunications services--FTS2001--has two goals: to ensure the best service and price for the government, and to maximize competition for services. In implementing this program strategy, GSA awarded two contracts for long-distance services--one to Sprint in December 1998 and one to MCI WorldCom in January 1999. Under the terms of these contracts, each firm was guaranteed minimum revenues of $750 million over the life of the contracts, which run for four base years and have four 1-year-extension options. If all contract options are exercised, those contracts will expire in December 2006 and January 2007, respectively. According to GSA, federal agencies spent approximately $614 million on FTS2001 services during fiscal year 2003 alone. Related governmentwide telecommunications services are provided by other GSA contracts: the Federal Wireless Telecommunications Service contract and the FTS Satellite Service contracts. The wireless contract was awarded in 1996 to provide wireless telecommunications products and services to all federal agencies, authorized federal contractors, and other users. The satellite services contracts are a series of contracts for a variety of commercial off-the-shelf satellite communications products and services, including mobile, fixed, and broadcast services. According to GSA, these contracts will expire in late 2004 and in 2007, respectively. We have periodically reviewed the development and implementation of the FTS2001 program and assessed its progress. In March 2001 we reported to you on the delays encountered during the government's efforts to transition from the previous FTS 2000 to the FTS2001 contracts, the reasons for those delays, and the effects of the delays on meeting FTS2001 program goals of maximizing competition for services and ensuring best service and price. We recommended that GSA take numerous actions to facilitate those transition efforts. In April 2001 in testimony before you, we reiterated those recommendations and noted that the process of planning and managing future telecommunications service acquisition would benefit from an accurate and robust inventory of existing telecommunications services. Ultimately, GSA acted on our recommendations and the transitions were successfully completed. GSA is now planning its FTS Networx acquisition program, including the awarding of new governmentwide contracts for a broad range of long distance and international voice and data communications services, wireless services, and satellite telecommunications services. These contracts are intended to replace the existing FTS2001, Federal Wireless Telecommunications Service, and FTS Satellite Service contracts. GSA and the IMC has identified five goals for the Networx acquisition program: Meet agency needs for a comprehensive acquisition that provides continuity of current telecommunications services and solutions. Obtain best value (lowest prices while maintaining quality of service levels) for all services and solutions. Encourage strong competition for the initial contract award(s), and ensure continuous competition throughout the life of the program. Respond to the changing marketplace by providing agency access to a broad range of services and service providers. Provide expanded opportunities for small businesses. To achieve those goals, the program calls for two acquisitions--Networx Universal and Networx Select. The Networx Universal contracts are expected to satisfy requirements for a full range of national and international network services. According to GSA, Networx Universal seeks to ensure the continuity of services and prices found under expiring contracts that provide broad-ranging service with global geographic coverage. GSA expects all Networx Universal offerors to provide a full range of voice and data network services, managed networking services and solutions, and network access, wireless, and satellite communications services. This acquisition is expected to result in multiple contract awards to relatively few offerors because few are expected to be able to satisfy the geographic coverage and comprehensive service requirements. GSA also intends to apply competitive incentives to obtain best value for its customer agencies, although those incentives are not yet defined. Further, GSA expects to establish minimum revenue guarantees for these contracts. In contrast, GSA plans to award multiple contracts for a more geographically limited set of services under Network Select. GSA generally describes these Select contracts as providing agencies with leading edge services and solutions with less extensive geographic and service coverage than that required by Networx Universal; specific Networx Select service requirements have not yet, however, been defined. Details of pricing structures and Select service delivery mechanisms are planned to be provided in the Networx Select request for proposals, which GSA intends to release in the summer of 2005. GSA anticipates awarding both the Networx Universal and the Networx Select contracts well before the expiration of the FTS2001 contracts. Notwithstanding the acquisition planning activities completed by GSA and the IMC to date, these entities face significant challenges in finalizing their program strategy to ensure that Networx is appropriately defined, structured, and managed to deliver those telecommunications services and solutions that will enable federal agencies to most efficiently and effectively meet their mission needs. Specifically, these challenges include: Ensuring that adequate inventory information is available to planners to provide an informed understanding of governmentwide requirements. Establishing measures of success to aid acquisition decision-making and enable effective program management. Structuring and scheduling the Networx contracts to ensure that federal agencies have available to them the competitively priced telecommunications services they need to support their mission objectives. Initiating the implementation planning actions needed to ensure a smooth transition from current contracts to Networx. It is important that GSA and its customer agencies have a clear understanding of agency service requirements in order to make properly informed acquisition planning decisions. According to our ongoing research on best practices in telecommunications acquisition and management, clear understanding comes at least in part from having an accurate baseline inventory of existing services and assets. More specifically, an inventory allows planners to make informed judgments based on an accurate analysis of current requirements and capabilities, emerging needs that must be considered, and the current cost of services. Although leading organizations acknowledge that establishing and maintaining such an inventory may be difficult, they view this baseline as an essential first step to high-quality telecommunications requirements analysis, and subsequent sourcing decisions associated with meeting those requirements. Despite this importance, it is not clear whether GSA and federal agencies have yet established the comprehensive, accurate inventories needed to support Networx planning. Mr. Chairman, you followed up on this issue in your December 17, 2003, letter to GSA asking to what extent such detailed inventories were currently being maintained and kept accurate and up-to- date for use both in acquisition planning and future contract transitions. In his response, the Administrator of General Services identified sources of information provided by GSA and the FTS2001 vendors--for example, monthly billing information--that would be helpful to agencies in developing inventories of existing services. In addition, the Administrator noted that GSA is examining methods of incorporating better billing and inventory data into the Networx program where practical. However, the Administrator did not provide specific information on the extent to which these inventories exist, or whether agencies are periodically validating that information to ensure that it is accurate and complete. Further, the Administrator acknowledged that the accuracy and completeness of telecommunications service inventories varies among agencies. As a result, without a clear understanding by GSA and its customer agencies of the FTS2001 services used today and the applications they support, it is unclear how properly informed Networx acquisition planning decisions can be made. Our research into recommended program and project measurement practices, which we affirmed in discussions with private-sector telecommunications managers, highlights the importance of establishing clear measures of success to aid acquisition decision making as well as to provide the foundation for accountable program management. Such measures define what must be done for a project to be acceptable to the stakeholders and users affected by it, and in so doing enables measurement of progress and effectiveness in meeting objectives. Although GSA has established program goals, it has not yet defined a comprehensive set of corresponding performance measures for the Networx acquisition program. According to GSA's Assistant Commissioner for Service Delivery/Development, one of the criteria for measuring Networx success will be identical to that used for FTS2001--that is, savings as measured by contract service costs compared with best commercial pricing. Further, according to this official, this was the sole measure reported to the Office of Management and Budget for FTS2001. While low pricing is an important criterion reflected in program goals, GSA has not yet defined measures about how well its final acquisition plan will deliver the value (service plus price) that agencies need to improve their operations and meet their mission needs. For example, GSA's Networx environmental assessment indicates that agencies want this program to support network planning and optimization, include simple and understandable fees, provide management of contracts and contractors on the agencies' behalf, and include other elements of value. GSA's Assistant Commissioner for Service Delivery/Development recognizes the importance of having such measures, and told us that GSA would be establishing such measures coincident with its actions to finalize the Networx Universal RFP in the coming months. It will be important that GSA follow through on this commitment to establish that appropriate set of measures to evaluate the intended business value of the Networx program and enable the effective management of this significant program over time. Once agency requirements are adequately understood and measures of success defined, structuring and scheduling the Networx contracts to successfully encourage industry competition to obtain low prices and high-quality, innovative services becomes the next challenge. The varying views of industry representatives commenting on the request for information raised fundamental questions about the soundness of the proposed acquisition approach for accomplishing this. For example, large, interexchange carriers, like those that hold the current FTS2001 contracts, generally agreed with the broad scope of the Universal contracts. They further suggested that services offered under Networx Select and Universal should be mutually exclusive, and that all carriers should be allowed to compete for both. In contrast, other carriers criticized the approach. These carriers asserted that some major telecommunications providers might be precluded from bidding on the Networx Universal contracts because of the broad service and ubiquitous geographic coverage requirements described in the request for information. For example, one vendor stated that it was quite possible that only traditional long distance carriers could effectively bid for Universal, thus denying many players in the industry a realistic chance to compete for major portions of the federal long distance business. One carrier noted that, based on the procurement timetable, the timing of the award for the Select contracts would minimize the opportunity to compete for long-distance telecommunications services. Because of the 9-month lag between the Universal and Select acquisitions indicated in the proposed acquisition schedule, agencies could be asked to make decisions regarding their use of awarded Universal service contracts before information is available regarding Select leading edge services and solutions that may be more suitable for their needs. Defining an acquisition strategy that appropriately balances the need to ensure the continuation of existing telecommunications services in all current government locations with encouraging strong competition to obtain best value is a daunting challenge. However, proceeding from a clear understanding of requirements and measures of success--as I previously discussed--should aid in meeting this challenge by providing guideposts for a decision that strikes an appropriate balance on contract scope, program structure, and acquisition schedules that can deliver to agencies competitively priced solutions that meet their mission needs. Further, continuing to solicit and effectively implement feedback from stakeholders should help GSA achieve this goal. As we reported to you in March 2001, the current FTS2001 contracts got off to a rocky start as significant delays in transitioning to the new contracts hindered timely achievement of program goals. Factors contributing to those delays included a lack of data needed to accurately measure and effectively manage the transitions, inadequate resources, and other process and procedural issues. Ultimately, GSA did take action on all of our recommendations and the transition to the FTS2001 contracts was finally completed. In subsequent testimony before you in April 2001 we noted the importance of incorporating the lessons learned from this transition into future procurements. Specifically, we stated that "the process of planning and managing future telecommunications service acquisitions--both by GSA and by the agencies themselves--will benefit from an accurate and robust inventory of current telecommunications services. Further, the value of this critical program to customer agencies will be improved through the application of lessons learned in streamlining and prioritizing the contract modification process, in effectively and expeditiously resolving billing problems, and in holding contractors accountable for meeting agency requirements in a timely manner." Those in industry who commented on the Networx request for information also noted the need for strong and comprehensive program management to ensure successful transition, including not only the availability of accurate inventories but also defined contractor and government responsibilities. While GSA recognizes the importance of transition planning, it has not yet fully addressed these issues. GSA has emphasized that its development of the Networx program included an analysis of lessons learned from existing programs and previous acquisitions. Further, in his February 11 letter in response to your inquiry about agency inventories, the Administrator outlined the proactive steps GSA plans to take, including actions to establish a working group and to improve the availability of accurate inventory information to support the transition. According to the GSA's Associate Commissioner Service Delivery/Development, these actions will also include developing processes and procedures, identifying funding needs, and training agency personnel in order to support a smooth contract transition. As acquisition plans are finalized in the coming months, it will be important that GSA follow through on these initial steps to ensure that the transition to the new contracts proceeds efficiently and seamlessly, and that a repeat of the FTS2001 transition difficulties is avoided. In summary, Mr. Chairman, Networx represents a critical opportunity to leverage the strength and creativity of the telecommunications marketplace to make the vision of delivering to agencies the telecommunications business solutions they need to perform their missions better and more cost-effectively a reality, and in so doing to carry the federal government forward well into the 21st century. To accomplish this, however, GSA will need to overcome significant challenges and demonstrate solid leadership. Likewise critical will be stakeholder commitment. Actions taken and decisions reached in the coming months to more fully define the Networx program and finalize an appropriate acquisition strategy will significantly influence the telecommunications choices federal agencies will have for the next several years. Unless GSA follows through to resolve the challenges outlined today, the potential of Networx may well not be realized. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the Committee may have at this time. Should you have any questions about this testimony, please contact me by e-mail at [email protected] or Kevin Conway, Assistant Director, at [email protected]. We can also be reached at (202) 512-6240 and (202) 512-6340, respectively. Another major contributor to this testimony was Michael P. Fruitman. 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 Genera1 Services Administration (GSA) has initiated planning for its next-generation telecommunications acquisition program, known as Networx, which will replace the current Federal Telecommunications System (FTS) 2001 for longdistance and international services. It will also replace contracts for wireless and satellite communications products and services. Planning for this acquisition is occurring within an environment of tremendous change--in the industry, in underlying services and technology, and potentially in the regulatory environment. In this context, Networx can offer a significant opportunity for the federal government to flexibly acquire telecommunications services at competitive rates and apply innovative solutions to improving agency operations. At the request of the Chairman of the House Committee on Government Reform, GAO is providing an overview of acquisition planning steps completed to date, along with its assessment of challenges facing GSA and federal agencies as this acquisition proceeds. Over the past year, GSA has acted to ensure that all interested parties-- including industry and agency users--have had a chance to comment on the development of the successor to FTS2001 and associated contracts. In its planning for the Networx acquisition, GSA cited five goals for the program: (1) continuity of telecommunications services, (2) best value, (3) strong competition, (4) a broad range of services and providers in a changing marketplace, and (5) expanded opportunities for small businesses. To achieve this, GSA plans two acquisitions: Networx Universal--broadranging services with global coverage, and Networx Select--leading-edge services but more geographically limited. To take full advantage of the opportunities offered in these new contracts, GSA will need to address four key challenges: (1) ensuring that an adequate inventory of information about existing telecommunications services and assets is available, to give planners an informed understanding of governmentwide requirements; (2) establishing specific measures of success to aid acquisition decision making and effective program management; (3) structuring and scheduling the contracts to ensure timely delivery of competitively priced telecommunications services that meet agency mission needs; and (4) ensuring a smooth transition from the current contracts by initiating appropriate implementation planning actions. Both leadership from GSA and commitment from stakeholders in resolving these issues will be essential to establishing efficient, cost-effective, and secure telecommunications services. If this can be achieved, the Networx contracts will be optimally positioned to leverage the power and creativity of today's telecommunications marketplace to carry the federal government forward well into the 21st century.
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VA is responsible for providing federal benefits to veterans. Headed by the Secretary of Veterans Affairs, VA operates nationwide programs for health care, financial assistance, and burial benefits. According to VA, in fiscal year 2009 the department received appropriations of almost $97 billion, including over $50 billion in discretionary funding, primarily for health care and approximately $47 billion in mandatory funding, primarily for disability compensation, pensions, and education benefit programs. VA is organized into three administrations to provide health care, financial, and burial benefits to veterans and their families: The Veterans Health Administration (VHA) provides a broad range of primary health care, specialized care, and related medical and social support services through its network of more than 1,200 medical facilities. The Veterans Benefit Administration (VBA) distributes financial benefits to veterans and their families related to compensation and pension, vocational rehabilitation and employment, home loans, life insurance, and education. The National Cemetery Administration (NCA) maintains national cemeteries and provides burial and memorial services to veterans. The Chief Financial Officers (CFO) of the 24 major departments and agencies identified in 31 U.S.C. SS 901(b) are required to, among other things, develop and maintain integrated accounting and financial management systems, including financial reporting and internal controls, and to direct, manage, and provide policy guidance and oversight of all agency financial management activities. These CFOs are also required to assist the heads of their agencies with annually preparing and submitting to Congress and the Office of Management and Budget audited financial statements and statements of assurance on the effectiveness of their agencies' systems of internal control. The Comptroller General's Standards for Internal Control in the Federal Government (the Green Book) provides that federal agencies should establish policies and procedures to ensure that the findings of audits and other reviews are promptly resolved. In addition, Office of Management and Budget (OMB) Circular No. A-123, Management's Responsibility for Internal Control, requires management to develop corrective action plans for material weaknesses--identified through management reviews, OIG and GAO reports, program evaluations, and financial statement audits-- and periodically assess and report on the progress of those plans. Further, the CFOC A-123 Guidance provides that agencies construct a corrective action planning framework to facilitate plan preparation, accountability, monitoring, and communication. The guidance provides that agency managers are responsible for developing and implementing action plans for taking timely and effective action to correct deficiencies. The CFOC A- 123 Guidance is widely viewed as a "best practices" methodology for executing the requirements of Appendix A of OMB Circular No. A-123. In the independent auditor's report on VA's fiscal year 2008 financial statements, the auditor identified the following three material weaknesses: Financial management system functionality--reported since fiscal year 2000, is linked to VA's outdated legacy financial systems impacting VA's ability to prepare, process, and analyze financial information that is reliable, timely, and consistent. Legacy system deficiencies necessitated significant manual processing of financial data and a large number of adjustments to the balances in the system, thereby increasing the risk of processing errors and misstatements in the financial statements. IT security controls--also reported as a material weakness since fiscal year 2000, resulted from the lack of effective implementation and enforcement of an agencywide information security program. Security weaknesses in the areas of access control, segregation of duties, change control, and service continuity continued to place VA's program and financial data at risk. For example, weaknesses in information security controls placed sensitive financial and veterans' medical and benefit information at risk of inadvertent or deliberate misuse, improper disclosure, theft, or destruction, possibly occurring without detection. Financial management oversight--reported as a material weakness beginning in fiscal year 2005 and as a significant deficiency in fiscal years 2000 through 2004. This weakness stemmed from a number of control deficiencies whose operational causes varied. Common issues included the recording of financial data without sufficient review and monitoring, a lack of human resources with the appropriate skills, and a lack of capacity to effectively process a significant volume of transactions. When aggregated, the independent auditor found that these deficiencies suggested a recurring theme of inadequate or ineffective financial management oversight. To help resolve the financial management system functionality material weakness, modernize the IT environment, and implement an integrated financial management system, VA established the Financial and Logistics Integrated Technology Enterprise (FLITE) program, managed by the FLITE Program Office, to replace its current legacy systems. The FLITE Program involves a multiple-year phased approach comprised of three major components: the Strategic Asset Management (SAM) project, a logistics and asset management system; the Integrated Financial Accounting System (IFAS), which focuses on financial management; and a data warehouse that is intended to assist in financial reporting. As of January 2009, VA planned to complete FLITE implementation in fiscal year 2014. Although VA had eliminated some significant deficiencies in prior years, other deficiencies have emerged that require attention. As a result of its recurring internal control weaknesses in financial reporting, VA continues to be at risk of processing errors and misstatements in VA's financial reports. The financial management system functionality material weakness, which is linked to VA's outdated financial systems, consists of seven underlying significant deficiencies. The following four significant deficiencies were newly reported in fiscal year 2008. VBA Benefit Delivery Network (BDN) and Veterans Services Network (VETSNET) had insufficient audit trail documentation for the transfer of data to a data warehouse and the storage of such data, increasing the risk of misstatements in the financial statements and other financial reports. VETSNET lacked data mining capabilities, thereby preventing VA financial managers from analyzing transactions at a level needed to prepare routine reconciliations on billions of dollars in transactions. Automated inventory systems at the Consolidated Mail Order Pharmacy facilities could not provide the data needed to properly record the cost of inventory, resulting in potential misstatements in the financial statements and other financial reports. VA lacked a system to track obligations and purchases by vendors resulting in VA relying on vendors to supply operational sales data on medical center purchases. Three of the seven significant deficiencies were repeat conditions: Inadequate year-end closing procedures for the financial system and related records, reported since fiscal year 2000, created a significant risk of error in the annual financial statements. Business line system integration problems, reported since fiscal year 2004, resulted in inadequate support for amounts recorded in the general ledger, such as VETSNET accounts receivables, and the potential for misstatements in the financial statements and other financial reports. Fixed asset reporting limitations, reported since fiscal year 2007, prohibited VA from readily identifying all current year PP&E additions and reclassifications of work in process. The financial management oversight material weakness, reflecting a recurring theme of inadequate or ineffective financial management oversight, consisted of nine underlying significant deficiencies. The following three were newly reported in fiscal year 2008: Missing records in the mortgage loan portfolio maintained by an outside contractor resulted in unsupported amounts and potential errors in the general ledger. Incorrect formulas for estimating the projected default rate for guaranteed and direct loans in VA's housing model could lead to material misstatements of estimated costs of guaranteed and direct loans in the financial statements and other financial reports. Incorrect expensing and capitalization of software development costs could result in an understatement of PP&E and an overstatement of operating program costs. Six of the nine significant deficiencies were repeat conditions: A lack of adequate review and follow-up procedures for accrued services payable and undelivered orders, reported since fiscal year 2007, resulted in invalid balances for obligations and accrued services payable and potential misstatements in the financial statements and other financial reports. VA reported a total of $8 billion in undelivered orders in fiscal year 2008. Untimely depreciation, improper recording of disposed assets, discrepancies in estimated useful life of equipment, and other inadequate capitalization and accounting for PP&E, reported since fiscal year 2000, could result in misstated PP&E and related expense accounts. VA reported a $13 billion PP&E balance in fiscal year 2008. Inconsistent methodologies and unsupported estimates for environmental and disposal liabilities, reported since fiscal year 2004, could lead to misstatements in the financial statements. VA reported a $928 million balance in environmental and disposal liabilities in fiscal year 2008. Inadequate review of unbilled receivables and contractual adjustments, reported since fiscal year 2007, could lead to misstatements of account receivable balances. VA reported over $1.7 billion in accounts receivable for fiscal year 2008. Inadequate BDN and VETSNET reconciliations, reported since fiscal year 2007, increased the likelihood that an error in the financial statements will occur and go undetected. BDN and VETSNET processed over $40 billion in compensation, pension, education, and vocational rehabilitation and employment benefits in fiscal year 2008. Inadequate reconciliations of the data input to the compensation and pension actuarial liability model, reported since fiscal year 2007, could result in misstatements in the financial statements. VA reported a $1.4 trillion actuarial liability in fiscal year 2008. In fiscal year 2008, VA reported successfully eliminating two prior significant deficiencies concerning insufficient follow-up of accounts receivable collections and errors in payroll data submissions to the Office of Personnel Management underlying the financial management oversight material weakness, as well as a prior material weakness regarding the retention of computer-generated detail records for benefit payments. VA has established corrective action plans intended to remediate many of its 16 significant deficiencies in the near term independent of FLITE implementation. However, although VA had corrective action plans in place, many of these corrective action plans did not contain the detail needed to provide VA or congressional oversight officials with assurance that the plans had near-term actions that could be effectively implemented on schedule. As shown in the table 1, VA planned to remediate 9 deficiencies in fiscal year 2009, 3 in fiscal year 2010, 3 in fiscal year 2012, and 1 in fiscal year 2014. However, VA lacked documented policies and procedures to ensure the consistent and comprehensive design of these plans, and most of VA's plans for correcting financial reporting deficiencies in the near term lacked key information suggested in CFOC A- 123 Guidance. Eight of the 13 plans we reviewed lacked key information as recommended by the CFOC A-123 Guidance. As shown in table 2, 5 plans lacked milestone dates for action steps, 1 plan lacked validation activities, and 2 plans lacked both milestone dates and validation activities. In accordance with CFOC A-123 Guidance, agencies should prepare comprehensive corrective action plans that list action steps with related monthly milestone dates to help ensure senior VA officials can monitor progress. Seven of VA's corrective action plans did not include intermediate milestone dates necessary to gauge whether planned corrective actions are proceeding according to schedule, thus increasing the risk that corrective action plans will not be implemented on schedule. For example, In one plan, VA combined several action steps, needed to rewrite the Consolidated Mail Order Pharmacy inventory management software, into one 2-year milestone period. For example, VA combined developing a statement of work, rewriting the software, and developing an inventory module for each CMOP into one 2-year milestone period. In addition, two other action steps lacked completion dates. Without interim milestones and completion dates, it is more difficult for VA officials to identify whether the necessary activities for remediating weaknesses are occurring and whether they are on schedule. Without such information, VA could miss opportunities to address issues that might hamper timely completion of the remediation. VHA's plan for addressing the inadequate monitoring and accounting for PP&E only specified the fiscal year in which the tasks were to be completed. The lack of intermediate milestones makes it difficult for senior management to adequately monitor the progress of implementation efforts. Because most action steps only had a fiscal year target date, it was unclear when during the year the steps were to be taken and whether or not they were sequential. In addition, the plan did not include any descriptions or related milestones for two action steps. In accordance with CFOC A-123 Guidance, senior management is responsible for determining when sufficient action has been taken to declare that a significant deficiency or a material weakness has been corrected, and corrective action plans should include activities to validate the resolution of the deficiency. Without such validation measures, it is difficult for VA management to provide assurance that the corrective actions have effectively remediated the deficiency. Three of VA's corrective action plans did not include activities to validate that the planned actions would resolve the deficiency. For example, the corrective action plan to address deficiencies in VA's automated inventory systems at its Consolidated Mail Order Pharmacy facilities did not include activities to validate whether action steps were implemented and the desired results achieved. Deficient corrective action plans (discussed previously) and ineffective oversight of corrective action plan implementation have resulted in missed remediation milestones, placing VA at risk of continued errors and misstatements in financial information. As of August 2009, VA had missed milestones in 5 of the 13 corrective action plans to remediate fiscal year 2008 significant deficiencies underlying the financial management system functionality and financial management oversight material weaknesses. Our analysis of corrective action plans for two significant deficiencies-- the untimely capitalization of construction projects and inadequate reconciliations related to benefit payments--showed that slipping milestones could jeopardize VA's completion of these plans by fiscal years 2009 and 2012 respectively, and therefore may impair VA's ability to obtain the improved data reliability originally envisioned within those time frames. For the plans lacking interim milestones, it is difficult for VA management to monitor progress, identify whether there is any slippage, and take timely steps to keep actions on track. The lack of milestones and the related accountability for meeting targets could also limit incentives for staff to ensure actions are implemented on schedule. In addition, VA lacked documented policies and procedures for overseeing the implementation of corrective action plans to remediate material weaknesses identified in financial statement audits. In January 2009, VA recognized the need to better coordinate these oversight activities and created an office of Financial Process Improvement and Audit Readiness (FPIAR). As shown in table 3, VA missed milestones in 5 of the 13 corrective action plans that we reviewed, and the status of progress in implementing 3 other plans was unknown because they lacked sufficient interim milestones. VA missed milestones related to preparation of detailed procedures for the Fixed Asset Package, PP&E policies and procedures, benefit payment reconciliations, the development of reports to support reconciliations of expense accounts in the actuarial liability model, and year-end closing procedures. An analysis of the status of corrective action plans for two significant deficiencies--the inadequate monitoring and accounting for PP&E and inadequate reconciliations related to benefit payments--provided examples of how missed milestones result in continuing risks of errors in related VA financial reporting. Specifically, VA missed its milestones for the creation of detailed procedures for capitalizing PP&E and automated reconciliations to support veteran benefit payments. Although the PP&E corrective action plan called for procedures related to timely capitalization of PP&E to be developed by March 2009, they had not been issued by August 2009. Failing to capitalize construction projects in a timely manner may lead to misstated financial information if projects are not capitalized in the same fiscal year they are placed in service. In addition, related depreciation expenses may also be misstated as a result of time lags in capitalizing projects. Finally, if projects are not closed out in a timely fashion, VA is unable to determine whether funds are available for use on other construction projects. Our analysis at two VHA medical facilities identified continuing problems in the timely capitalization of PP&E. According to federal accounting standards and VA policy issued by VA's Assistant Secretary for Management (the VA CFO), construction projects are to be recorded as work in process (WIP) until they are placed in service, at which time the WIP balances are to be transferred to general PP&E. We reviewed the 21 projects at the Albuquerque, New Mexico Medical Center and the 4 projects at the Lyons, New Jersey Medical Center that had been placed into service since the start of fiscal year 2008 and found continuing significant delays in the amount of time it took to close out and capitalize projects after they were placed in service. In Albuquerque, VA fiscal staff told us their undocumented practice was to capitalize projects within 30 days of being placed in service. However, while they had capitalized 11 of 21 projects within 30 days, 6 projects were not capitalized for 30 to 60 days, and 4 projects were not capitalized for more than 120 days after they had been placed into service. At Lyons, VA staff capitalized 3 of 4 projects more than 180 days after they were placed in service. VBA also experienced slipping milestones in remediating the benefit payment reconciliation deficiency. VBA did not perform necessary reconciliations between the BDN and VETSNET systems and VA's general ledger on a monthly basis prior to March 2008. Lacking such reconciliation VA is at continuing risk of improper reporting of benefit payments. That year, these systems processed over $41.6 billion in benefits payments related to compensation and pension, as well as a portion of education benefit programs as authorized by law. This information is critical to the correct determination of VA's overall cost of operations. VBA developed a corrective action plan to correct this deficiency that contained 43 separate activities with related milestones, including developing automated reconciliations, documenting processes, and training end users. According to VBA documents and officials, VBA missed and pushed back milestones related to the development of reports supporting veteran education payments and automated reconciliations. For example, as of August 2009, work on the development of detailed reports supporting the Vocational Rehabilitation and Employment education payments was pushed back 5 months from November 2009 to April 2010 and VBA reported slippage ranging from 3 to14 months in the development of various reconciliations supporting Dependent's Education Benefits. VA lacked policies and procedures for overseeing the design and implementation of corrective action plans to correct financial reporting material weaknesses identified in financial statement audits. Further, VA did not have an agencywide accountability mechanism in place to oversee and coordinate the remediation of the material weaknesses in financial reporting. Rather, VA delegated responsibility for the design, implementation, and oversight of the corrective action plans to the various administrations and offices responsible for the areas in which the deficiencies were identified (e.g., VHA and VBA). Lacking centralized VA- wide guidance, the administrations inconsistently defined the parameters for milestone dates in corrective action plans. For example, VHA corrective action plans provided milestones by fiscal year, while VBA plans often had monthly milestone dates. As a result, VA's ability to determine the status of corrective action plan implementation and identify and address any slippages was impaired. In contrast to its financial reporting weaknesses, VA had documented policies and procedures to identify and correct its programmatic material weaknesses, specifically those in the areas of accountability and effectiveness over VA programs and operations. These policies and procedures, which could also be applied to the remediation of financial reporting material weaknesses identified through financial statement audits, are outlined in a manual which includes a detailed template for developing corrective action plans that specified parameters for milestone dates and other key information. Further, VA had a Senior Assessment Team (SAT) in place (chaired by the Assistant Secretary for Management and comprised of other senior management representatives from VA and its three administrations) to oversee remediation of programmatic control weaknesses detected through VA's internal control reviews completed under OMB Circular No. A-123. In January 2009, VA recognized the need to better oversee and coordinate agencywide oversight activities for financial reporting material weaknesses identified through financial statement audits. Specifically, VA recruited a director to head a new office of Financial Process Improvement and Audit Readiness (FPIAR) reporting to the VA Deputy CFO in the Office of Finance under the VA Assistant Secretary for Management. FPIAR was established with responsibility for: coordinating and overseeing comprehensive corrective action plans for VA's audit-related material weaknesses, in consultation and coordination with VA's three administrations and applicable staff offices; assisting VA and the three administrations and staff offices in executing and monitoring the corrective action plans; ensuring compliance of VA offices and field stations with VA policies, plans, procedures, and internal controls; and assisting in updating corrective action plans as needed and developing recommendations and actions for ensuring completion of stated objectives and milestones in the event of slippage. In addition, the FPIAR Director's position description calls for FPIAR to perform analysis and remediation efforts for any comparable internal control deficiencies being resolved as part of VA's ongoing OMB Circular No. A-123 reviews in concert with work to remediate VA's audit-related material weaknesses. Integrating VA's A-123 review process and remediation activities for financial reporting material weaknesses identified in financial statement audits could enhance the efficiency of VA's corrective actions and the elimination of material weaknesses. As of September 2009, according to FPIAR's Director, VA had filled three permanent staff positions and hired six full-time contractors to assist VA in addressing a variety of financial reporting issues (e.g., helping address the IT Security Controls material weakness and outstanding issues surrounding the capitalization of software development costs, updating and reformatting corrective action plans, and developing requirements for an interface between VETSNET and VA's general ledger). The VA Deputy CFO said that as office operations have evolved, VA has decided to hire one or two more permanent staff for the FPIAR and use contractors to fill other positions. He said that contractors can provide VA with the flexibility to address short-term staffing needs as well as the necessary technical expertise to remediate individual significant deficiencies. However, the FPIAR did not have a workforce plan defining the number of staff and expertise needed in the office. In fiscal year 2009, while not included in documented policies and procedures, the FPIAR began practices intended to establish agencywide procedures for oversight of corrective action plans to remediate material weaknesses identified in financial statement audits. For example, the FPIAR Director began participating in monthly SAT meetings chaired by the Assistant Secretary for Management and attended by other senior VA officials including the VHA CFO and VBA CFO. These meetings provide an opportunity for the FPIAR Director to highlight the status of specific corrective actions underway to address financial reporting significant deficiencies requiring the attention of key stakeholders across the agency. Further, the director told us that by the end of calendar year 2009, the FPIAR intends to begin using a corrective action plan template consistent with the CFOC A-123 Guidance to remediate significant deficiencies identified in the fiscal year 2009 financial statement audit. Because VA has developed a corrective action template for addressing A-123 control deficiencies, the FPIAR Director told us she is considering whether to adopt this template for corrective action plans to remediate financial reporting control weaknesses, which could provide efficiencies and help integrate resolution of some deficiencies. VA's Deputy CFO also told us that oversight by the SAT, combined with the use of the corrective action plan template, will allow for more rigorous oversight of remediation efforts of weaknesses detected in the financial statement audits. VA has had serious, long-standing material weaknesses in financial reporting that could result in significant misstatements in financial information reported to Congress and used by VA to manage its operations. One of the significant deficiencies is not planned for resolution until FLITE is fully implemented, which will not be until 2014. Other deficiencies can be addressed in the near term. While VA has corrective action plans for near-term actions intended to provide more accurate and complete financial data, they often lacked key information. Consequently, VA managers could not readily identify and address slippage in remediation activities, exposing VA to continued risk of errors in financial information and reporting. Immediate actions to provide a rigorous framework for the design and oversight of corrective action plans will be essential to ensuring the timely remediation of internal control weaknesses before FLITE implementation. Well-defined corrective action plans provide a "road map" for remediation activities and facilitate effective oversight by senior VA officials. Continued support from senior VA officials and administration CFOs will also be critical to ensure that key corrective actions are developed and implemented on schedule. To help focus VA's corrective action plans on more effectively establishing and completing consistent and comprehensive near-term actions, we recommend that the Secretary of VA direct the Assistant Secretary for Management to issue policies and procedures for identifying and reporting on financial audit weaknesses to include: Detailed guidance (such as a set of tools and templates in place to identify and report on programmatic weaknesses) on required corrective action plan elements (including milestones for completion of interim action steps and validation steps). Establishing a VA Secretariat-level agency-wide governance structure for overseeing all OMB Circular No. A-123 and financial statement audit material weakness remediation activities that provides for (1) involving key stakeholders in the remediation process (such as the FPIAR, administration CFO's, and other senior VA officials); (2) clearly defining stakeholder roles and responsibilities; (3) establishing and implementing strategic workforce planning for FPIAR; and (4) regularly assessing and reporting on the status of corrective action plans and identification of any actions needed to address any slippages of remediation activities. To help ensure the timely and complete capitalization of property, plant, and equipment, we recommend that the Secretary of VA direct the Assistant Secretary for Management to issue procedures on specific actions and identify specific reasonable time frames, such as within 30 days, to implement VA policy to capitalize PP&E projects when they are placed in service. In its written comments, VA generally agreed with our findings and recommendations and identified specific actions it has taken and plans to take to implement these recommendations. In response to our recommendation to provide detailed guidance (such as a set of tools and templates in place to identify and report on programmatic weaknesses) on required corrective action plan elements (including milestones for completion of interim action steps and validation steps), VA stated that the FPIAR has begun integrating its corrective actions for financial audit weaknesses with VA's OMB Circular No. A-123 processes. VA also said that FPIAR will migrate to a set of corrective action plan tools, templates, and documented procedures in fiscal year 2010. VA partially concurred with our recommendation that VA establish a Secretariat-level agencywide governance structure for OMB Circular No. A-123 and financial statement audit remediation activities. In its comments, VA stated it already established a Senior Assessment Team as the coordinating body for corrective action planning to address control deficiencies identified as a result of OMB Circular No. A-123 reviews and financial statement audits. As discussed in our draft report, we recognized VA has taken action to establish agencywide accountability for oversight of its corrective action plans and has begun to establish related practices. However, these practices had not yet evolved into the rigorous framework needed to effectively ensure timely control weakness remediation. VA stated that its Internal Controls Service is developing a handbook for all stakeholders that will provide detailed guidance for corrective action planning, monitoring, reporting, and validation procedures for all financial statement audit and OMB Circular No. A-123 significant deficiencies and material weaknesses. Also, VA noted that as FPIAR matures, it will continue to define and meet staffing requirements. VA also concurred with our recommendation that VA issue procedures for specific actions and identify reasonable time frames, such as within 30 days, to implement VA policy to capitalize PP&E projects when they are placed in service. VA provided a copy of recently issued procedures which identified specific actions and time frames for the capitalization of PP&E. These procedures provide guidance for monthly communications between engineering staffs, program directors, and the appropriate fiscal activity regarding construction project status, costs, and useful life. The procedures also provide that property should be capitalized no later than the end of the fiscal month following the month that the property is put into use or accepted by VA. If fully and effectively implemented, the guidance should help address the problems we found related to timely capitalization of VA's PP&E. In its written comments, VA also provided technical comments which we considered and incorporated as appropriate. We are sending copies of this report to other interested congressional committees and to affected federal agencies. In addition, this report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-9095 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. To determine the nature of the internal control weaknesses identified in the Department of Veterans Affairs (VA) fiscal year 2008 financial audit report and how long they have been outstanding, we obtained and analyzed the financial statement audit reports for fiscal years 2000 to 2008. We summarized available information on the extent and nature of the internal control weaknesses characterized as material weaknesses, as well as the underlying significant deficiencies and identified their evolution over time. We also interviewed VA and Office of Inspector General (OIG) officials and VA's independent auditor, and reviewed VA documents, prior GAO and OIG reports, and independent auditor workpapers to better understand control deficiencies underlying the material weaknesses. We did not perform independent audit work to test and validate whether the material weaknesses and related significant deficiencies reported by the independent auditor were accurate and complete. To determine whether VA had plans appropriately focused on near-term actions to address financial reporting deficiencies prior to the implementation of its Financial and Logistics Integrated Technology Enterprise (FLITE) system in fiscal year 2014, we analyzed VA's corrective action plans for remediating significant deficiencies underlying two of the three material weaknesses impacting the reliability of financial information integral for helping inform management decision making-- weaknesses in VA's financial management systems and in its financial management oversight. We interviewed VA officials, VA OIG officials, and independent auditor officials who completed VA's fiscal year 2008 financial statement audit about near-term actions in VA plans to correct these underlying significant deficiencies. We also analyzed related corrective action plans to remediate 15 of the 16 significant deficiencies underlying two material weaknesses to determine whether they included key information specified in the Chief Financial Officers Council's (CFOC) Implementation Guide for OMB Circular A-123, Management's Responsibility for Internal Control - Appendix A, Internal Control over Financial Reporting: action steps with related milestones to provide a "road map" for remediation activities, validation activities to help ensure the proposed actions worked as envisioned, a description of the deficiency to be corrected in sufficient detail to provide clarity and facilitate a common understanding of what needs to be done, and clear delineation of responsible officials for completing the planned actions. We also reviewed VA's task work plan to remediate the final significant deficiency--the documentation of data transfer from VBA benefit payment systems to a data warehouse--in fiscal year 2009. To determine whether VA had appropriate oversight mechanisms in place to help ensure that near-term corrective action plans to address financial reporting deficiencies are implemented on schedule, we assessed the status of plan implementation in July and August 2009 by identifying whether VA met specific milestones and any slippages that had occurred. We also evaluated the timeliness of implementation of corrective action plans for two significant deficiencies--one to address the inadequate capitalization and accounting for property, plant, and equipment (PP&E) and another to improve reconciliations of benefit payments. One plan was designed and implemented by the Veterans Health Administration, and one by the Veterans Benefit Administration--the two principal VA administrations. We selected these plans for further review because the related deficiencies were not currently being audited or reviewed by other oversight organizations, their associated account balances exceeded a material dollar threshold ($12.7 billion), and the deficiencies contributed to the two material weaknesses that we, VA officials, and VA's independent auditor considered most integral for developing useful and reliable information for decision making. We reviewed these plans' implementation in detail to determine the extent to which delays jeopardized VA's ability to remediate these control deficiencies and provide reliable financial management information to senior VA officials prior to FLITE implementation. In this regard, we reviewed documentation and transactions concerning 25 projects that had been placed in service since the start of fiscal year 2008: 21 projects at the Albuquerque, New Mexico Medical Center and 4 projects at the Lyons, New Jersey Medical Center to determine how long it took VA to capitalize these projects after they had been placed in service. We also reviewed VA's progress in implementing benefit payment reconciliation procedures in a timely manner. We interviewed VA, OIG, and independent auditor officials about mechanisms in place to oversee the design and implementation of near- term corrective action plans to remediate material financial reporting weaknesses identified through financial statement audits. We reviewed minutes of oversight meetings involving senior VA management to determine how VA monitored the status of remediation efforts related to internal control deficiencies identified through financial statement audits. We also interviewed agency officials about VA's overall accountability for timely remediation of internal control deficiencies in the near term, and reviewed the status of ongoing VA efforts to staff a new office responsible for coordination and oversight of the development of corrective action plans. We conducted our audit work from November 2008 to November 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. GAO Contact - Susan Ragland, (202) 512-9095 or [email protected]. Staff Acknowledgments - In addition to the contact named above, Glenn Slocum (Assistant Director), Richard Cambosos, Patrick Frey, W. Stephen Lowrey, David Ramirez, and George Warnock made key contributions to this report.
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In fiscal year 2008, the Department of Veterans Affairs (VA) identified three material internal control weaknesses over financial reporting--financial management system functionality, IT security controls, and financial management oversight. VA is developing a new financial system--FLITE--but full implementation is not expected until 2014. Therefore, the Subcommittee asked us to determine whether VA corrective action plans and oversight are appropriately focused on near-term actions to provide improved financial information. This report addresses (1) the nature of the internal control weaknesses identified in the VA fiscal year 2008 financial audit report and how long they have been outstanding, (2) whether VA had plans appropriately focused on near-term corrective actions, and (3) whether VA had appropriate oversight mechanisms in place to help assure that near-term corrective action plans are implemented on schedule. GAO reviewed corrective action plans for significant deficiencies underlying 2 of the 3 material weaknesses and performed additional analysis for two underlying significant deficiencies. VA's fiscal year 2008 material weaknesses in financial management system functionality and financial management oversight have been reported since fiscal years 2000 and 2005, respectively. These two material weaknesses are comprised of 16 underlying significant financial reporting control deficiencies. Although VA had eliminated some significant deficiencies in prior years, other deficiencies have emerged. As a result, continuing serious deficiencies in financial reporting leave VA at risk of processing errors and misstatements in its financial statements. Although VA had corrective action plans in place intended to result in near-term remediation of the 16 fiscal year 2008 significant control deficiencies, many of these plans did not contain the detail needed to provide VA officials with assurance that the plans could be effectively implemented on schedule. VA lacked documented policies and procedures needed to assure the consistent and comprehensive design of these corrective action plans, and 8 of 13 of VA's plans for correcting its financial reporting deficiencies lacked key information regarding milestones for action steps and validation activities.As of August 2009, VA had missed milestones in 5 of the 13 corrective action plans. For example, our analysis of plans for remediating deficiencies regarding the capitalization of property, plant, and equipment and inadequate benefit payment reconciliations showed that slipping milestones could jeopardize VA's timely completion of these plans, and consequently may impair VA's ability to obtain improved data reliability within the time frames originally envisioned. VA lacked documented policies and procedures for overseeing implementation of the corrective action plans, but recently took steps intended to better coordinate its oversight activities.
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Since 1998 VA and DOD have been trying to achieve the capability to share patient health care data electronically. The original effort--the government computer-based patient record (GCPR) project--included the Indian Health Service (IHS) and was envisioned as an electronic interface that would allow physicians and other authorized users at VA, DOD, and IHS 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 some 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 effort 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 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. The departments reported total GCPR/FHIE costs of about $85 million through fiscal year 2003. The revised strategy also envisioned the pursuit of 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 the development of 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 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 have stated that they anticipate 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 calendar year 2005. While VA and DOD are making progress in agreeing to and adopting standards for clinical data, they continue to face significant challenges in providing a virtual medical record based on the two-way exchange of data as part of their HealthePeople (Federal) initiative. Specifically, VA and DOD do not have an explicit architecture that provides details on what specific technologies they will use to achieve the exchange capability; a fully established project management structure that will ensure the necessary day-to-day guidance of and accountability for the departments' investment in and implementation of the exchange; and a project management plan describing the specific responsibilities of each department in developing, testing, and deploying the interface and addressing security requirements. VA's and DOD's ability to exchange data between their separate health information systems is crucial to achieving the goals of HealthePeople (Federal). Yet, successfully sharing health data between the departments via a secure electronic interface between each of their data repositories can be complex and challenging, and depends significantly on the departments' having a clearly articulated architecture, or blueprint, defining how specific technologies will be used to achieve the interface. Developing, maintaining, and using an architecture is a best practice in engineering information systems and other technological solutions. An architecture would articulate, for example, the system requirements and design specifications, database descriptions, and software descriptions that define the manner in which the departments will electronically store, update, and transmit their data. VA and DOD lack an explicit architecture that provides details on what specific technologies they will use to achieve the exchange capability, or just what they will be able to exchange by the end of 2005--their projected date for having this capability operational. While VA officials stated that they recognize the importance of a clearly defined architecture, they acknowledged that the departments' actions were continuing to be driven by the less specific, high-level strategy that has been in place since September 2002. Officials in both departments stated that a planned pharmacy prototype initiative, begun this past March in response to requirements of the National Defense Authorization Act of 2003, would assist them in defining the electronic interface technology needed to exchange patient health information. The act mandated that VA and DOD develop a real-time interface, data exchange, and capability to check prescription drug data for outpatients by October 1, 2004. In late February, VA hired a contractor to develop the planned prototype but the departments had not yet fully determined the approach or requirements for it. DOD officials stated that the contractor was expected to more fully define the technical requirements for the prototype. In late April, the departments reported approval of the contractor's requirements and technical design for the prototype. While the pharmacy prototype may help define a technical solution for the two-way exchange of health information between the two departments' existing systems, there is no assurance that this same solution can be used to interface the new systems under development. Because the departments' new health information systems--major components of HealthePeople (Federal)--are scheduled for completion over the next 4 to 9 years, the prototype may only test the ability to exchange data in VA's and DOD's existing health systems. Thus, given the uncertainties regarding what capabilities the pharmacy prototype will demonstrate, it is difficult to predict how or whether the prototype initiative will contribute to defining the architecture and technological solution for the two-way exchange of patient health information for the HealthePeople (Federal) initiative. 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 HealthePeople (Federal). Based on our past work, we have found that a project management structure should establish relationships between managing entities with each entity's roles and responsibilities clearly articulated. Further, it is important to establish final decision- making authority with one entity. However, VA and DOD have not fully established a project management structure that will ensure the necessary day-to-day guidance of and accountability for the departments' investment in and implementation of the two-way capability. According to officials in both departments a joint working group and oversight by the Joint Executive Council and VA/DOD Health Executive Council has provided the collaboration necessary for HealthePeople (Federal). However, this oversight by the executive councils is at a very high level, occurs either bimonthly or quarterly, and encompasses all of the joint coordination and sharing efforts for health services and resources. Since a lead entity has not been designated, neither department has had the authority to make final project decisions binding on the other. Further, the roles and responsibilities for each department have not been clearly articulated. Without a clearly defined project management structure, accountability and a means to monitor progress are difficult to establish. In early March, VA officials stated that the departments had designated a program manager for the planned pharmacy prototype and were establishing roles and responsibilities for managing the joint initiative to develop an electronic interface. Just this month, officials from both departments told us that this individual would be the program manager for the electronic interface. However, they had not yet designated a lead entity or provided documentation for the project management structure or their roles and responsibilities for the HealthePeople (Federal) initiative. An equally important component necessary for guiding the development of the electronic interface is a project management plan. Information technology project management principles and industry best practices emphasize that a project management plan is needed to define the technical and managerial processes necessary to satisfy project requirements. Specifically, the plan should include, among other things, the authority and responsibility of each organizational unit; a work breakdown structure for all of the tasks to be performed in developing, testing, and deploying the software, along with schedules associated with the tasks; and a security policy. However, the departments are currently operating without a project management plan for HealthePeople (Federal) that describes the specific responsibilities of each department in developing, testing, and deploying the interface and addressing security requirements. This month, officials from both departments stated that a pharmacy prototype project management plan that includes a work breakdown structure and schedule was developed in mid-March. They further stated that a work group that reports to the integrated project team has been given responsibility for the development of security and information assurance provisions. While these actions should prove useful in guiding the development of the prototype, they do not address the larger issue of how the departments will develop and implement an interface to exchange health care information between their systems by 2005. Without a project management plan, VA and DOD lack assurance that they can successfully develop and implement an electronic interface and the associated capability for exchanging health information within the time frames that they have established. VA and DOD officials stated that they have begun discussions to establish an overall project plan. Achieving an electronic interface that will enable VA and DOD to exchange patient medical records is an important goal, with substantial implications for improving the quality of health care and disability claims processing for the nation's military members and veterans. In seeking a virtual medical record based on the two-way exchange of data between their separate health information systems, VA and DOD have chosen a complex and challenging approach that necessitates the highest levels of project discipline, including a well-defined architecture for describing the interface for a common health information exchange; an established project management structure to guide the investment in and implementation of this electronic capability; and a project management plan that defines the technical and managerial processes necessary to satisfy project requirements. These critical components are currently lacking; thus, the departments risk investing in a capability that could fall short of expectations. The continued absence of these components elevates concerns about exactly what capabilities VA and DOD will achieve--and when. To encourage significant progress on achieving the two-way exchange of health information, we recommend that the Secretaries of Veterans Affairs and Defense instruct the Acting Chief Information Officer for Health and the Chief Information Officer for the Military Health System, respectively, to develop an architecture for the electronic interface between their health systems that includes system requirements, design specifications, and software descriptions; select a lead entity with final decision-making authority for the initiative; establish a project management structure to provide day-to-day guidance of and accountability for their investments in and implementation of the interface capability; and create and implement a comprehensive and coordinated project management plan for the electronic interface that defines the technical and managerial processes necessary to satisfy project requirements and includes (1) the authority and responsibility of each organizational unit; (2) a work breakdown structure for all of the tasks to be performed in developing, testing, and implementing the software, along with schedules associated with the tasks; and (3) a security policy. The Secretary of Veterans Affairs provided written comments on a draft of this report and we received comments via e-mail from DOD's Interagency Program Integration and External Liaison for Health Affairs; both concurred with the recommendations. Each department's comments are reprinted in their entirety as appendixes I and II, respectively. In their comments, the officials also provided information on actions taken or underway that, in their view, address our recommendations. We are sending copies of this report to the Secretaries of Veterans Affairs and Defense and to the Director, Office of Management and Budget. Copies will also be available at no charge on GAO's Web site at www.gao.gov. Should you have any question on matters contained in this report, please contact me at (202) 512-6240, or Barbara Oliver, Assistant Director, at (202) 512-9396. We can also be reached by e-mail at [email protected] and [email protected], respectively. Other key contributors to this report were Michael P. Fruitman, Valerie C. Melvin, J. Michael Resser, and Eric L. Trout.
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A critical element of the Department of Veterans Affairs' (VA) information technology program is its continuing work with the Department of Defense (DOD) to achieve the ability to exchange patient health care information and create electronic medical records for use by veterans, active-duty military personnel, and their health care providers. While VA and DOD continue to move forward in agreeing to and adopting standards for clinical data, they have made little progress since last winter toward defining how they intend to achieve an electronic medical record based on the two-way exchange of patient health data. The departments continue to face significant challenges in achieving this capability. VA and DOD lack an explicit architecture--a blueprint--that provides details on what specific technologies will be used to achieve the electronic medical record by the end of 2005. The departments have not fully implemented a project management structure that establishes lead decision-making authority and ensures the necessary day-to-day guidance of and accountability for their investment in and implementation of this project. They are operating without a project management plan describing the specific responsibilities of each department in developing, testing, and deploying the electronic interface. In seeking to provide a two-way exchange of health information between their separate health information systems, VA and DOD have chosen a complex and challenging approach--one that necessitates the highest levels of project discipline. Yet critical project components are currently lacking. As such, the departments risk investing in a capability that could fall short of what is expected and what is needed. Until a clear approach and sound planning are made integral parts of this initiative, concerns about exactly what capabilities VA and DOD will achieve--and when--will remain.
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The pilot program was undertaken as part of the Air Force Materiel Command's Manufacturing 2005 strategy, which envisions a future where an integrated military-commercial industrial base will ensure the Air Force access to superior technologies at dramatically reduced costs. As part of the strategy, the Air Force analyzed key military sectors, including electronics. It noted that electronic components are pervasive throughout weapon systems, accounting for more than 40 percent of the cost of aircraft, 70 percent of air launched missiles, and 80 percent of spacecraft. Therefore, reducing the cost of manufacturing electronics components through integrated production would be a major factor in controlling the costs of all Air Force systems. To move toward this vision, the Air Force's Wright Laboratory awarded a 4-year, $21.5-million pilot research and development contract to TRW's Avionics Systems (military) Division in May 1994. The goals of the TRW pilot are to (1) demonstrate that a military-unique product can be technically redesigned for manufacture on a commercial production line at lower cost and have equal or better quality; (2) identify barriers currently in place that limit integrated military-commercial efforts; and (3) transfer lessons learned in part through a "model" contract for future collaborative electronics production efforts. The objective is to develop solutions that are not "contract-specific" or "one-time waivers" but, rather, have broad applicability to other DOD contracts. TRW military is scheduled to produce the Communication, Navigation, and Identification (CNI) avionics components for the F-22 fighter aircraft. Similar components are used for the Comanche helicopter program. Under the pilot contract, TRW military has subcontracted a demonstration production effort for the manufacture of two CNI modules to its sister division, TRW's Automotive Electronics Group (commercial division). While the TRW military division currently assembles electronic modules by hand, commercial production takes place on an automated assembly line. Under the pilot arrangement, the TRW military division will assume responsibility for some government requirements that could interfere with its commercial division's production practices. According to the Pilot Program Manager at Wright Laboratory, the savings achieved by the pilot will depend partly on the efforts to modify the subcontract between the two TRW divisions. Greater savings are expected if commercial practices are used in place of military practices. The pilot is now in the second of three phases and is scheduled to be completed in May 1998. Generally, the pilot's tasks are to (1) compare and document military and commercial business practices as well as recommend and demonstrate best business practices that are acceptable to both government and commercial producers; (2) redesign the modules for commercial automated production, while meeting the needs of the F-22; and (3) demonstrate production of military modules on a commercial line along with commercial products. Thirty of each module will be produced in late 1996 to validate the design. Based on the results of the test run, modifications will be made to the modules' design and the production line. An additional 60 of each module will then be manufactured and available for F-22 qualifications testing. At the end of phase I, the pilot had successfully completed the conceptual redesign of the modules to allow integrated production. Integrated production is now possible through recent manufacturing advances. The low volume of military electronics purchases does not provide sufficient economic incentives for commercial manufacturers. Recent advances such as flexible manufacturing allow integrated production of small lots of military products with other production lots, thus maintaining a high utilization rate for the line. The redesign of the components should comply with the more stringent requirements for automated production rather than the manual manufacturing process used by the military. In redesigning the modules, one of the most significant changes is the use of plastic parts instead of the ceramic parts commonly used by the military. According to pilot officials, cumulative commercial experience with plastic electronic components has proven them to be reliable in nonmilitary applications. The transition to plastic is consistent with the need to design for manufacturing and incorporates more cost-effective materials used by commercial producers. Further, the redesigned components are expected to be assembled more quickly and to weigh 15 percent less than their military versions. The next step is to produce a sample of the modules to validate the redesign. The pilot modules will be tested to meet F-22 and Comanche requirements, such as durability requirements of 20 plus years. Pilot officials claim the redesigned modules can meet all the same functional requirements as the original design with the possible exception of one condition--a temperature requirement. However, they believe that additional analyses and tests will show that this condition can be successfully resolved. If the pilot program produces avionics modules on the commercial production line when planned, the F-22 schedule allows for testing and integrating the modules. According to an F-22 Program Office official, if the modules pass all ground test requirements, the office can instruct Lockheed Martin to substitute the pilot components for those produced by TRW military and actually perform validation and verification of the pilot modules on an F-22 experimental aircraft. One of the primary benefits of encouraging commercial producers to manufacture military products is that lower costs result from spreading overhead over greater quantities and taking advantage of other economies that come with large-scale manufacturing operations. For example, large volume discounts can be obtained when purchasing some materials. Pilot officials currently estimate that producing the modules commercially will save about 40 percent compared to the F-22 program cost estimates. About one-third of the estimated savings stems from reduced labor costs. TRW's commercial division assembles over 15,000 electronics components per day, versus the few hundred per year that are manually produced by the military group. About 20 percent of the savings are expected from using less expensive materials. Another 20 percent of the pilot savings are expected to come from reduced administrative costs associated with statutory and regulatory compliance. Savings from eliminating military specifications and standards, such as for testing and screening and other material compliance requirements, make up the bulk of the remaining estimated savings. The pilot manager emphasized that the projected savings assumes the contract is modified to remove certain government requirements, and the estimate may change if requirements are not removed, or if material costs or the F-22 estimates change. The most important benefit foreseen from the pilot is not from lower costs for the specific pilot components, but from future electronics procurement. Even by saving 40 percent of the cost, the projected savings will not match the $21-million cost of the pilot, nor was this the pilot's intention. The payoff will result from applying the lessons learned from this pilot to future Air Force electronics procurement. According to the pilot manager, TRW has estimated $126 million in savings by applying pilot concepts to all F-22 CNI modules. After working through the multitude of requirements with a profitable commercial company, pilot officials plan to develop recommendations and a model subcontract that will serve DOD purposes yet not impede commercial operations. In turn, wider participation by commercial entities in military production may reduce military-unique production costs. In addition, pilot officials see other benefits from demonstrating and promoting broader integration. DOD may be better able to take advantage of technological advances developed by commercial firms. For example, one pilot official noted that although military contractors could also adopt advanced automated manufacturing techniques, it might not be cost-effective, given the typically small size of military orders. However, since the investment in commercial production is spread over a large quantity of products, it makes good business sense for commercial companies to continuously incorporate state-of-the-art manufacturing processes. Other benefits that may occur with integrated production include more timely production of defense components, greater competition for defense business from a larger base of commercial manufacturers, and a greater surge capacity for defense items in the event of future conflict. Despite the climate of acquisition reform, this pilot program must overcome many hurdles. These hurdles have primarily resulted from reconciling major differences in business practices and procedures between the way the government operates and the way commercial businesses operate. Acquisition reform initiatives have not allowed this pilot to capitalize on technological advances that allow a small number of military items to be integrated with production at a commercial manufacturing facility. The pilot has identified large differences between the contracting and operating procedures of TRW's commercial and military divisions. The pilot program offers a good opportunity for making such comparisons. Because the two divisions have the same corporate parent, they could share business-sensitive and proprietary information and, therefore, avoid some of the difficulties other companies might experience in sharing information. Based on their findings, the pilot program aims to highlight areas in the defense procurement system that can be streamlined to facilitate future collaboration with commercial companies. Pilot teams, including both TRW divisions, reviewed two sets of requirements that the commercial group found objectionable. One set of requirements includes Federal Acquisition Regulation (FAR) and Defense FAR supplement clauses, and the other set contains technical military specifications and standards for producing the items. For contractual requirements, the teams initially identified 55 clauses. (See app. I.) Many of the requirements targeted by the pilot, such as cost or pricing information, data rights, and quality standards are the same ones that have been identified in several major acquisition reform studies and that commercial firms claim deter them from competing for government projects. After the pilot teams analyze the origin and purpose of the requirements, they will then determine whether action should be taken to alleviate the defense-unique requirements they impose. This effort is projected to be completed at the end of 1996. This analysis is also a critical component of the pilot since a key objective is to develop a contract that allows TRW's commercial division to maintain its normal business practices as much as possible. TRW's commercial division does not want this pilot to adversely affect its highly successful commercial business. Unless waivers or workarounds are granted for many of these government-unique requirements, the pilot will be limited in demonstrating the benefits of commercial practices, including the savings associated with high-volume material purchases. The difference between commercial and military practices, according to a pilot report, is often not in the actual compliance with a requirement, but in the level of documentation required. For example, TRW's commercial division agreed to the FAR clause on affirmative action for Vietnam veterans because the clause is consistent with standard commercial practices. However, FAR clause 52.222-37, "Employment Reports on Special Disabled Veterans and Veterans of the Vietnam Era," is not consistent with those practices. This clause requires an annual report on the number of disabled and Vietnam veterans currently employed--by job category and location and of the number of new hires by category. TRW said that several contract clauses repeat requirements imposed by other public laws, although there is a wide gap between the detailed proof of compliance the government requires and commercial enterprises' requirements. While analyzing the differences in requirements, pilot officials found that barriers to commercial production are not created by the Air Force alone. In examining the Lockheed Martin F-22 subcontract with TRW's military division, officials noted that the Air Force originated 49 of the 204 contract requirements and Lockheed Martin added the remainder. For example, Lockheed Martin added part of Military Specification 2000a regarding documentation of soldering. To meet the specification conditions, TRW is required to add a reporting step for defects under the F-22 subcontract that it believes is unnecessary and incompatible with commercial operations. DOD officials said they recognize contractors adding detailed requirements can be a problem, but told us they can do little about it. One of the lessons of this pilot is that prime contractors need to consider removing some of their requirements. Although DOD has actively proposed and implemented acquisition reform measures, key reform efforts have not helped move the pilot forward. For example, the revised commercial item definition, intended to streamline government requirements, does not apply to the pilot components. DOD has reduced the use of military standards and allows DOD contractors to use uniform government requirements across a facility, but neither action benefits the pilot. The Defense Acquisition Pilot Program could provide some of the statutory relief needed to demonstrate that military products can be manufactured on commercial lines, but the pilot is not part of the program. After identifying an initial list of requirements not typically found in commercial contracts, pilot officials studied removing some of those requirements. Rather than approaching each requirement individually, pilot officials hoped that if the components could be considered commercial items as defined by the Office of Federal Procurement Policy Act as amended by the Federal Acquisition Streamlining Act of 1994, a number of government-unique requirements could be waived. Pilot officials reasoned in part that since the avionics components are being designed, developed, and produced on a commercial assembly line, the components could be considered "commercial items." The Air Force concluded, and we agree, that the components do not qualify as commercial items because the commercial item definition does not apply to military-unique items. Thus, integrated production efforts such as the pilot do not benefit from the act's definition. Over the course of this pilot, several other reforms have been instituted that may support integrated production in the long run, but do not further the pilot's demonstration of integrated production benefits. For example, in June 1994, the Secretary of Defense directed that commercial performance standards be used in place of military specifications. However, this directive does not cover all government-unique requirements and focuses on new contracts. Many contracts for major weapons systems, such as the F-22, were awarded before the directive became effective. In December 1995, the Secretary moved to streamline existing requirements with the Single Process Initiative. This initiative allows a "block change" approach to modify contracts so that management and manufacturing processes can be consolidated across all contracts at a single facility. It does not provide relief for the pilot because it is directed toward defense contractor facilities. Congress enacted provisions under the National Defense Authorization Acts of 1991 and 1996 to allow DOD to conduct pilots to test ways to increase the efficiency and effectiveness of the acquisition process. The 1996 provisions allow DOD to designate two entire defense facilities that would operate under the rules that apply to commercial items. Specific facilities have not yet been authorized. The 1991 provisions permit pilot programs to be conducted in accordance with standard commercial, industrial practices, and provides some waiver authority, with the specific programs to be designated by law. Five pilots were authorized in 1994 under the 1991 provisions. The TRW pilot could show benefits of military-commercial production under the 1991 DOD Acquisition Pilot provisions, but it is not part of the program established under the provisions. Although the TRW pilot was developed as a result of the Air Force Manufacturing 2005 initiative, the initiative provided no authority to waive requirements. From the beginning, the pilot has had to undergo a lengthy and complex process just to get the contract negotiated for the TRW divisions to work together. Because of all the defense-unique requirements that had to be addressed, pilot program officials spent 3 months trying to negotiate contractual terms and conditions acceptable to the commercial division. To finally get the subcontract negotiated, the military division agreed to accept responsibility for complying with government requirements related to purchasing materials. To fully demonstrate the benefits of producing military items on commercial lines, the pilot subcontract must be modified. Under the existing agreement, the military group purchases materials to reduce the number of the military requirements passed on to the commercial group. Yet to take full advantage of the price and quality benefits from large volume discounts and long-standing supplier relationships, the commercial division must purchase the materials. The pilot must use standard procedures to request deviations or waivers from the military requirements in order to modify the subcontract so that the commercial division can purchase materials. The standard waiver process requires a detailed analysis of the original intent for a clause and a justification for the waiver. Similarly, the new rules for purchasing commercial items do not apply. According to a Judge Advocate General official, no policy exists that allows the pilot to be considered anything but an ordinary procurement. To move the pilot forward with a streamlined subcontract, pilot officials also have to contend with an acquisition culture that is resistant to change. The TRW pilot was initiated by working-level engineers and others at Wright Laboratory who saw opportunities to actually demonstrate the advantages of working with the commercial sector. While the Secretary of Defense's demonstration initiatives have top DOD support and congressional waivers, the TRW pilot is a "grassroots" effort. Starting from the lower tiers, regulatory relief is obtained only by asking successively higher tiers to take responsibility for waivers to rules or for approving alternatives to accepted ways of operating. This is a time-consuming process and involves some risk, yet provides little incentive for approving deviations to traditional defense business procedures without specific directions from the highest levels. This pilot represents a low-risk effort to demonstrate the potential benefits of designing and producing a military component on a commercial line. Accordingly, we recommend that the Air Force, in consultation with TRW, identify those government-unique requirements that prevent the pilot from demonstrating that military items can be produced at equal or better quality on commercial production lines at substantially lower prices and then seek Secretary of Defense waivers. We recommend that the Secretary of Defense move quickly to waive those requirements within his authority that pilot officials believe impede the successful completion of the pilot. Further, we recommend that, where necessary, the Secretary seek legislative relief from those impediments he cannot waive. For example, the Secretary could request approval for the TRW pilot to proceed as part of the DOD Defense Acquisition Pilot Program. In commenting on a draft of this report, DOD indicated that it did not concur with our recommendations, stating the pilot has not identified any specific roadblock that the Secretary of Defense needs to remove or that requires a waiver. DOD indicated that (1) providing a waiver for the pilot would not necessarily accomplish the project's objective of demonstrating the feasibility of building military products on commercial lines in the future and (2) designating this pilot as a DOD acquisition pilot would be contrary to one of the TRW pilot's objectives, which is to identify barriers and then develop and demonstrate business practices to nullify those barriers. We disagree that the pilot has not identified specific roadblocks that need to be removed or that require a waiver. The pilot team, including both TRW divisions, has identified numerous government unique requirements that TRW's commercial division found objectionable. Many of the requirements, such as cost or pricing information, data rights, and quality standards, are the same ones that have been identified in several major acquisition reform studies and that commercial firms claim deter them from competing for government projects. Unless the pilot can get beyond these requirements, the pilot will be limited in demonstrating the benefits of commercial production, including the savings that the Air Force recognizes are needed in order to control the costs of future weapons systems. The intent behind our recommendations is to allow the pilot to move beyond these well recognized and thoroughly studied barriers so that it can demonstrate a better and cheaper way to procure electronic components for the F-22 aircraft program. We believe the bottom-up approach taken by the pilot is an important step in changing the prevailing culture found in defense acquisition. We believe implementation of our recommendation will enhance the pilot's chances for successfully demonstrating that a military item can be redesigned and produced on a commercial line at significant cost savings--a theme that underlies the Secretary of Defense's "Mandate for Change" and the Air Force Manufacturing 2005 study. DOD's comments in their entirety are reprinted in appendix II along with our specific evaluation of them. We interviewed and obtained information from pilot project officials at TRW, the Wright Patterson Pilot Program Manager, the TRW Program Manager, Wright Patterson contracting officials, the Judge Advocate General representative, an F-22 Program Office official, and the Air Force Office of the Assistant Secretary for Acquisition. We also reviewed documents such as the pilot contract and phase I contract reports and early recommendations, the Federal Acquisition Streamlining Act, implementing regulations, the Defense Authorization Acts from 1991 and 1996, and studies and reports related to acquisition reform. We observed manufacturing procedures at TRW's military division. We conducted our review from September 1995 to January 1996 in accordance with generally accepted government auditing standards. We did not independently verify pilot estimates of savings from using commercial practices, nor did we verify that the clauses initially targeted by the pilot for possible waiver are impediments. We are sending copies of this report to the Secretaries of Defense and the Air Force; the Director, Office of Management and Budget; and other interested congressional committees. Copies will also be available to others on request. Please contact me at (202) 512-4587 if you or your staff have any questions concerning this report. The contributors to this report were Katherine Schinasi, Monica Kelly, Marguerite Mulhall, Gordon Lusby, William Woods, and John Brosnan. Examination of Records by Comptroller General Price Reduction for Defective Cost or Pricing Data Subcontractor Cost or Pricing Data Termination of Defined Benefit Pension Plans Revision or Adjustment of Plans for Postretirement Benefits Other Than Pensions Administration of Cost Accounting Standards Certification of Claims and Requests for Adjustment or Relief Inspection of Research and Development Duty Free Entry - Qualifying Country End Products and Supplies Transportation of Supplies by Sea Restrictions on Subcontractor Sales to the Government Requirement for Certificate of Procurement Integrity - Modification Limitation on Payments to Influence Certain Federal Transactions Protecting the Government's Interest When Subcontracting With Contractors Debarred, Suspended or Proposed for Debarment Acquisition From Subcontractors Subject to On-site Inspection Under the Intermediate Range Nuclear Forces Treaty Notice and Assistance Regarding Patent and Copyright Infringement Rights in Technical Data and Computer Software (continued) FAR 52.222-35. The following are GAO's comments on the Department of Defense's (DOD) letter dated April 10, 1996. 1. Numerous studies document current regulatory and statutory barriers to military-commercial integration. In fact, DOD is pursuing a variety of initiatives, such as the single process initiative and reinvention laboratories, based on the results of those studies. As it gains experience from its acquisition reform efforts, DOD has learned that there is likely to be no one solution to overcoming barriers. However, we are not aware of any other initiatives that address what we believe is unique about the TRW pilot program, which is the production of a military-unique component in a commercial facility. We believe that pursuing the objective of identifying barriers in the TRW pilot at the risk of missing the schedule of producing and testing the F-22 module would represent a lost opportunity. 2. DOD's comment does not address any information in the report. 3. According to pilot officials and program documents, the pilot is identifying all possible barriers that were in place when the contract was signed, regardless of their current status. This is also true, for example, for the military quality standard--MIL-Q-9858A--which has been abrogated by the Secretary of Defense. 4. We agree, and state in the report, that the commercial item definition does not apply to military-unique components such as those being produced in the TRW pilot. 5. This comment deals with minor modifications to a commercial item for military use. It is not relevant to the TRW pilot, which is attempting to produce a military-unique item in a commercial facility. 6. We agree. DOD's comment supports our point that other DOD acquisition reform initiatives do not provide relief for this pilot. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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GAO provided information on the Department of Defense's (DOD) Military Products from Commercial Lines Pilot Program, focusing on the: (1) program's potential for achieving benefits sought from acquisition reform; and (2) barriers to achieving these benefits. GAO found that: (1) the pilot program has demonstrated that redesigning military components for commercial production appears technically feasible; (2) pilot program officials believe that if the use of commercial practices and policies is permitted, military production costs could be reduced by an average of 40 percent and the Air Force's requirements for the F-22 could be met; (3) other expected benefits from the pilot program include accelerated assembly, a more technically advanced and lighter weight product, and valuable lessons learned for future large electronic procurements; (4) for the pilot program to be successful and to encourage commercial participation, significant differences in commercial and military business practices have to be overcome; (5) although the pilot program has been successful in identifying government-unique requirements that present barriers to the most efficient use of commercial production lines, acquisition reform measures have not removed these barriers; (6) DOD must also overcome an acquisition culture that has historically resisted change and does not provide sufficient incentives for acquiring products from commercial producers; and (7) unless waivers are granted for many of the defense-unique requirements or workarounds, the pilot program will be limited in demonstrating that military items can be produced commercially at substantially lower prices.
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Over the past 20 years, DOD has been engaged in an effort to modernize its aging tactical aircraft force. The F-22A and JSF, along with the F/A-18E/F, are the central elements of DOD's overall recapitalization strategy for its tactical air forces. The F-22A was developed to replace the F-15 air superiority aircraft. The continued need for the F-22A, the quantities required, and modification costs to perform its mission have been the subject of a continuing debate within DOD and the Congress. Supporters cite its advanced features--stealth, supercruise speed, maneuverability, and integrated avionics--as integral to the Air Force's Global Strike initiative and for maintaining air superiority over potential future adversaries. Critics argue that the Soviet threat it was originally designed to counter no longer exists and that its remaining budget dollars could be better invested in enhancing current air assets and acquiring new and more transformational capabilities that will allow DOD to meet evolving threats. Its fiscal year 2007 request includes $800 million for continuing development and modifications for aircraft enhancements such as equipping the F-22A with an improved ground attack capability and improving aircraft reliability. The request also includes about $2.0 billion for advance procurement of parts and funding of subassembly activities for the initial 20 aircraft of a 60-aircraft multiyear procurement. JSF is a replacement for a substantial number of aging fighter and attack aircraft currently in the DOD inventory. For the Air Force, it is intended to replace the F-16 and A-10 while complementing the F-22A. For the Marine Corps, the JSF is intended to replace the AV-8B and F/A-18 A/C/D; for the Navy, the JSF is intended to complement the F/A-18E/F. DOD estimates that as currently planned, it will cost $257 billion to develop and procure about 2,443 aircraft and related support equipment, with total costs to maintain and operate JSF aircraft adding $347 billion over the program's life cycle. After 9 years in development, the program plans to deliver its first flight test aircraft later this year. The fiscal year 2007 budget request includes $4 billion for continuing development and $1.4 billion for the purchase of the first 5 procurement aircraft, initial spares, and advance procurement for 16 more aircraft to be purchased in 2008. We have frequently reported on the importance of using a sound, executable business case before committing resources to a new product development. In its simplest form, such a business case is evidence that (1) the warfighter's needs are valid and can best be met with the chosen concept and quantities, and (2) the chosen concept can be developed and produced within existing resources--that is, proven technologies, design knowledge, adequate funding, and adequate time to deliver the needed product. At the heart of a good business case is a knowledge-based strategy to product development that demonstrates high levels of knowledge before significant commitments of time and money are made. The future of DOD's tactical aircraft recapitalization depends largely on the outcomes of the F-22A and JSF programs--which represent about $245 billion in investments to be made in the future. Yet achieving expected outcomes for both these programs continues to be fraught with risk. We have reported that the F-22A's original business case is unexecutable and does not reflect changing conditions over time. Currently, there is a significant mismatch between the Air Force's stated need for F-22A aircraft and the resources the Office of the Secretary of Defense (OSD) is willing to commit. The business case for the JSF program, which has 90 percent of its investments still in the future, significantly overlaps production with development and system testing--a strategy that often results in cost and schedule increases. Both programs are at critical junctures that require DOD to make important business decisions. According to the Air Force, a minimum of 381 modernized F-22A aircraft are needed to satisfy today's national strategic requirements--a buy that is roughly half the 750 aircraft originally planned, but more than double the 183 aircraft OSD states available funding can support. Since the Air Force began developing the F-22A in 1986, the business case for the program has changed radically-- threats have changed, requirements have been added, costs have increased, funds have been added, planned quantities have been reduced, and deliveries of the aircraft to the warfighter have been delayed. There is a 198-aircraft capability gap today. Decisions in the last 2 years have worsened the mismatch between Air Force requirements and available resources, further weakening the F-22A program's business case. Without a new business case, an agreement on an appropriate number of F-22As for our national defense, it is uncertain as to whether additional investments in the program are advisable. The original business case for the F-22A program was to develop air superiority fighters to counter a projected threat of significant quantities of advanced Soviet fighters. During the 19-year F-22A development program, that threat did not materialize to the degree expected. Today, the requirements for the F-22A have evolved to include what the Air Force has defined as a more robust ground attack capability to destroy expected air defense systems and other ground targets and an intelligence-gathering capability. However, the currently configured F-22A is not equipped to carry out these roles without further investments in its development. The F-22As modernization program is currently being planned for three basic blocks, or spirals, of increasing capability to be developed and delivered over time. Current Air Force estimates of modernization costs, from 2007 through 2016, are about $4.3 billion. Additional modernization is expected, but the content and costs have not been determined or included in the budget. OSD has restructured the acquisition program twice in the last 2 years to free up funds for other priorities. In December 2004, DOD reduced the program to 179 F-22As to save about $10.5 billion. This decision also terminated procurement in 2008. In December 2005, DOD changed the F-22A program again, adding $1 billion to extend production for 2 years to ensure a next-generation fighter aircraft production line would remain in operation in case JSF experienced delays or problems. It also added 4 aircraft for a total planned procurement of 183 F-22As. As part of the 2005 change, aircraft previously scheduled in 2007 will not be fully funded until 2008 or later. OSD and the Air Force plan to buy the remaining 60 F-22As in a multiyear procurement that would buy 20 aircraft a year for 3 years--2008 through 2010. The Air Force plans to fund these aircraft in four increments--an economic order quantity to buy things cheaper; advanced procurement for titanium and other materials and parts to protect the schedule; subassembly; and final assembly. The Air Force plans to provide Congress a justification for multiyear procurement in May 2006 and the fiscal year 2007 President's Budget includes funds for multiyear procurement. The following table shows the Air Force's plan for funding the multiyear procurement. Air Force officials have told us that an additional $400 million in funds are needed to complete the multiyear procurement and that the accelerated schedule to obtain approval and start the effort adds risk to the program, creating more weaknesses in the current F-22A business case. A 198-aircraft gap between what the Air Force needs and what is affordable raises questions about what additional capabilities need to be included in the F-22A program. In March 2005, we recommended that the Air Force develop a new business case that justified additional investments in modernizing the aircraft to include greater ground attack and intelligence-gathering capabilities before moving forward. DOD responded to our report that business case decisions were handled annually in the budget decisions and that the QDR would analyze requirements for the F-22A and make program decisions. However, it is not clear from the QDR report, issued last month, what analyses were conducted to determine the gaps in capability, the alternatives considered, the quantities needed, or the costs and benefits of the F-22A program. Therefore, questions about the F-22A program remain: What capability gaps exist today and will exist in the future (air superiority, ground attack, electronic attack, intelligence gathering)? What alternatives besides the F-22A can meet these needs? What are the costs and benefits of each alternative? How many F-22As are needed? What capabilities should be included? Until these questions are answered and differences are reconciled, further investments in the program--for either the procurement of new aircraft or modernization--cannot be justified. The JSF program appears to be on the same path as the F-22A program. After being in development for 9 years, the JSF program has not produced the first test aircraft, has experienced substantial cost growth, has reduced the number of planned aircraft, and has delayed delivery of the aircraft to the warfighter. Moreover, the JSF program remains committed to a business case that invests heavily in production before testing has demonstrated acceptable performance of the aircraft. At the same time, the JSF program has contracted to develop and deliver the aircraft's full capability in a single-step, 12-year development program--a daunting task given the need to incorporate the technological advances that, according to DOD, represent a quantum leap in capability. The business case is a clear departure from the DOD policy preference that calls for adopting an evolutionary approach to acquisitions. Furthermore, the length and cost of the remaining development are exceedingly difficult to accurately estimate, thereby increasing DOD's risks in contracting for production. With this risky approach, it is likely that the program will continue to experience significant cost and schedule overruns. The JSF program expects to begin low-rate initial procurement in 2007 with less than 1 percent of the flight test program completed and no production representative prototypes built for the three JSF variants. Technologies and features critical to JSF's operational success, such as a low observable and highly common airframe, advanced mission systems, and maintenance prognostics systems, will not have been demonstrated in a flight test environment when production begins. Other key demonstrations that will have not been either started or only in the initial stages before production begins include testing with a fully integrated aircraft--mission systems and full software, structural and fatigue testing of the airframe, and shipboard testing of Navy and Marine Corps aircraft. When the first fully integrated and capable development JSF is expected to fly in 2011, DOD will already have committed to buy 190 aircraft at an estimated cost of $26 billion. According to JSF program plans, DOD's low- rate initial production quantities will increase from 5 aircraft a year in 2007 to 133 a year in 2013, when development and initial operational testing are completed. By then, DOD will have procured more than double that amount--424 aircraft at an estimated cost of about $49 billion, and spending for monthly production activities is expected to be about $1 billion, an increase from $100 million a month when production is scheduled to begin in 2007. Figure 1 shows the significant overlap in development and testing and the major investments in production. The overlap in testing and production is the result of a business case and acquisition strategy that has proven to be risky in past programs like F-22A, Comanche, and B-2A, which far exceeded the cost and delivery goals set at the start of their development programs. JSF has already increased its cost estimate and delayed deliveries despite a lengthy replanning effort that added over $7 billion and 18 months to the development program. JSF officials have stated that the restructured program has little or no flexibility for future changes or unanticipated risks. The program has planned about 8 years to complete significant remaining activities of the system development and demonstration phase, including fully maturing 7 of the 8 critical technologies; completing the designs and releasing the engineering drawings for all manufacturing and delivering 15 flight test aircraft and 7 ground test developing 19 million lines of software code; and completing a 7-year, 12,000-hour flight test program. The JSF program's latest planned funding profile for development and procurement, produced in December 2004 by the JSF program office, assumes annual funding rates to hover close to $13 billion between 2012 and 2022, peaking at $13.8 billion in 2013. If the program fails to achieve its current estimated costs, funding challenges could be even greater than that. The Office of Secretary of Defense Cost Analysis Improvement Group was to update its formal independent cost estimate in the spring of 2005. The group now does not expect to formally complete its estimate until spring 2006, but its preliminary estimate was substantially higher than the program office's. A modest cost increase would have dramatic impacts on funding. For example, a 10 percent increase in production costs would amount to over $21 billion (see fig. 2). DOD has recently made decisions to reduce near-term funding requirements that could cause future JSF costs to increase. It had begun to invest in the program to develop an alternative engine for the aircraft, but now plans to cancel further investments in order to make the remaining funds available for other priorities. According to DOD, it believes that there is no cost benefit or savings with an engine competition for the JSF and there is low operational risk with going solely with a single engine supplier. DOD has already invested $1.2 billion in funding for this development effort through fiscal year 2006. By canceling the program, it expects to save $1.8 billion through fiscal year 2011. Developing alternative engines is a practice that has been used in past fighter aircraft development programs like the F-16 and F-15 programs. An alternative engine program may help maintain the industrial base for fighter engine technology, result in price competition in the future for engine acquisition and spare parts, instill incentives to develop a more reliable engine, and ensure an operational alternative should the current engine develop a problem that would ground the entire fleet of JSF aircraft. As result, the JSF decision should be supported by a sound business case analysis. To date, we have not seen such an analysis. Finally, the uncertainties inherent in concurrently developing, testing, and producing the JSF aircraft prevent the pricing of initial production orders on a fixed price basis. Consequently, the program office plans to place initial procurement orders on cost reimbursement contracts. These contracts will provide for payment of allowable incurred costs, to the extent prescribed in the contract. With cost reimbursement contracts a greater cost risk is placed on the buyer--in this case, DOD. For the JSF, procurement should start when risk is low enough to enter into a fixed price agreement with the contractor based on demonstrations of the fully configured aircraft and manufacturing processes. DOD has not been able to achieve its recapitalization goals for its tactical aircraft forces. Originally, DOD had planned to buy a total of 4,500 tactical aircraft to replace the aging legacy force. Today, because of delays in the acquisition programs, increased development and procurement costs, and affordability pressures, it plans to buy almost one-third fewer tactical aircraft (see fig. 3). The delivery of these new aircraft has also been delayed past original plans. DOD has spent nearly $75 billion on the F-22A and JSF programs since they began, but this accounts for only 122 new operational aircraft. Because DOD's recapitalization efforts have not materialized as planned, many aircraft acquired in the 1980s will have to remain in the inventory longer than originally expected, incurring higher investment costs to keep them operational. According to DOD officials, these aging aircraft are approaching the end of their service lives and are costly to maintain at a high readiness level. While Air Force officials assert that aircraft readiness rates are steady, they agree that the costs to operate and maintain its aircraft over the last decade have risen substantially. Regardless, the military utility of the aging aircraft is decreasing. The funds used to operate, support, and upgrade the current inventory of legacy aircraft represent opportunity costs that could be used to develop and buy new aircraft. From fiscal years 2006 to 2011, DOD plans to spend about $57 billion for operations and maintenance and military personnel for legacy tactical fighter aircraft. Some of these funds could be invested in newer aircraft that would be more capable and less costly to operate. For example, the Air Force Independent Cost Estimate Summary shows that the F-22A will be less expensive to operate than the F-15. The F-22A will require fewer maintenance personnel for each squadron, and one squadron of F-22As can replace two squadrons of F-15. This saves about 780 maintenance personnel as well as about $148 million in annual operating and support cost according to the independent cost estimate. Over the same time frame, DOD also plans to spend an average of $1.5 billion each year---or $8.8 billion total--to modernize or improve legacy tactical fighter aircraft (see fig. 4). Further delays or changes in the F-22A or JSF programs could require additional funding to keep legacy aircraft in the inventory and relevant to the warfighter's needs. In testimony last year, we suggested that the QDR would provide an opportunity for DOD to assess its tactical aircraft recapitalization plans and weigh options for accomplishing its specific and overarching goals. In February 2006, the Secretary of Defense testified that recapitalization of DOD's tactical aircraft is important to maintain America's air dominance. Despite this continued declaration about recapitalizing tactical aircraft, DOD's 2006 QDR report did not present a detailed investment strategy that addressed needs and gaps, identified alternatives, and assessed costs and benefits. With limited information contained in the QDR report, many questions are still unanswered about the future of DOD's tactical aircraft modernization efforts. As DOD moves forward with its efforts to recapitalize its tactical aircraft force, it has the opportunity to reduce operating costs and deliver needed capabilities to the warfighter more quickly. To take advantage of this opportunity, however, DOD must fundamentally change the way it buys weapon systems. Specifically, the department must change how it selects weapon systems to buy, and how it establishes and executes the business case. Although the F-22A program has progressed further in the acquisition process than the JSF program, both programs are at critical decision-making junctures, and the time for DOD to implement change is now. Before additional investments in the F-22A program are made, DOD and the Air Force must agree on the aircraft's capabilities and quantities and the resources that can be made available to meet these requirements. A cost and benefit analysis of F-22A capabilities and alternative solutions weighed against current and expected threats is needed to determine whether a sound business case for the F-22A is possible and whether investing an additional $13.8 billion over the next 5 years to procure or modernize these aircraft is justified. With more than 90 percent of investment decisions to develop, test, and buy JSF aircraft remaining, DOD could implement significant changes in its business case before investing further in the JSF program. The JSF program should delay production and investments in production capability until the aircraft design qualities and integrated mission capabilities of the fully configured and integrated JSF aircraft variants have been proven to work in flight testing. Also, an evolutionary acquisition strategy to limit requirements for the aircraft's first increment of capabilities that can be achieved with proven technologies and available resources could significantly reduce the JSF program's cost and schedule risks. Such a strategy would allow the program to begin testing and low-rate production sooner and, ultimately, to deliver a useful product in sufficient quantities to the warfighter sooner. Once the JSF is delivered, DOD could begin retiring its aging and costly tactical aircraft. Capabilities that demand as yet undemonstrated technologies would be included as requirements in future JSF aircraft increments that would be separately managed. An evolutionary, knowledge-based acquisition approach would not only help significantly minimize risk and deliver capabilities to the warfighter sooner, it would be in line with current DOD policy preferences. DOD's use of an evolutionary, knowledge-based approach is not unprecedented. The F-16 program successfully evolved capabilities over the span of 30 years, with an initial F-16 capability delivered to the warfighter about 4 years after development started. Figure 5 illustrates the F-16 incremental development approach. The F-16 program provides a good acquisition model for the JSF program. For JSF, an evolutionary approach could entail delivering a first increment aircraft with at least as much capability as legacy aircraft with sufficient quantities to allow DOD to retire its aging tactical aircraft sooner and reduce operating inefficiencies. Limiting development to 5-year increments or less, as suggested in DOD's acquisition policy, would force smaller, more manageable commitments in capabilities and make costs and schedules more predictable. Some of the more challenging JSF capabilities, such as advanced mission systems or prognostics technologies, would be deferred and added to follow-on efforts once they are demonstrated in the technology development environment--a more conducive environment to maturing and proving new technologies. A shorter system development phase would have other important benefits. It would allow DOD to align a program manager's tenure to the completion of the phase, which would enable program managers to be held accountable for decisions. It also would allow DOD to use fixed-price-type contracts for production, and thereby reduce the government's cost risk. Additionally, DOD should do a more comprehensive business case analysis of the costs, benefits and risks before terminating the alternative engine effort. A competitive engine program may (1) incentivize contractors' to minimize life cycle costs; (2) improve engine reliability and quality in the future; (3) provide operational options; and (4) maintain the industrial base. At a broader level, DOD needs to make more substantive changes to its requirements, funding, and acquisition processes to improve weapon system program outcomes. We have recommended these changes in past reports and DOD has agreed with them. The January 2006 Defense Acquisition Performance Assessment report, based on a study directed by the Deputy Secretary of Defense, made some important observations regarding DOD acquisitions. The report concluded that the current acquisition process is slow, overly complex, and incompatible with meeting the needs of DOD in a diverse marketplace. Notably, the report confirmed that a successful acquisition process must be based on requirements that are relevant, timely, informed by the combatant commanders, and supported by mature technologies and resources necessary to realize development. The report also pointed out that DOD's acquisition process currently operates under a "conspiracy of hope," striving to achieve full capability in a single step and consistently underestimating what it would cost to attain this capability. The report makes a number of key recommendations for changing DOD's acquisition process including the following: develop a new requirements process that has greater combatant commander involvement and is time-phased, fiscally informed, and jointly prioritized; change the current acquisition policy to ensure a time-constrained development program is strictly followed; keep program managers from the start of development through delivery of the "Beyond Low-Rate Initial Production Report"; and move the start of a development program to the point in time that a successful preliminary design review is completed. Our work in weapons acquisition and best practices over the past several years has drawn similar conclusions. We have made numerous recommendations on DOD's acquisition processes and policy--as well as recommendations on specific major weapon system programs--to improve cost, schedule, and performance outcomes and to increase accountability for investment decisions. In 2000, DOD revised its acquisition policy to address some of our recommendations. Specifically, DOD has written into its policy an approach that emphasizes the importance of knowledge at critical junctures before managers agree to invest more money in the next phase of weapon system development. Theoretically, a knowledge-based approach results in evolutionary--that is, incremental, manageable, predictable--development and uses controls to help managers gauge progress in meeting cost, schedule, and performance goals. However, DOD policy lacks the controls needed to ensure effective implementation of this approach. Furthermore, decision makers have not consistently applied the necessary discipline to implement its acquisition policy and assign much-needed accountability for decisions and outcomes. Some of key elements of acquisition that we believe DOD needs to focus on include the following: constraining individual program requirements by working within available resources and by leveraging systems engineering; establishing clear business cases for each individual investment; enabling science and technology organizations to shoulder the ensuring that the workforce is capable of managing requirements trades, source selection, and knowledge-based acquisition strategies; establishing and enforcing controls to ensure appropriate knowledge is captured and used at critical junctures before moving programs forward and investing more money; and aligning tenure for program managers that matches the program's acquisition time to ensure greater accountability for outcomes. In conclusion, despite DOD's repeated declaration that recapitalizing its aging tactical aircraft fleet is a top priority, the department continues to follow an acquisition strategy that consistently results in escalating costs that undercut DOD's buying power, forces DOD to reduce aircraft purchases, and delays delivering needed capabilities to the warfighter. Continuing to follow a strategy that results in disappointing outcomes cannot be encouraged--particularly given our current fiscal and national security realities. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or other members of the subcommittee may have. Joint Strike Fighter: DOD Plans to Enter Production before Testing Demonstrates Acceptable Performance, GAO-06-356 (Washington D.C.: March 15, 2006). Defense Acquisitions: Business Case and Business Arrangements Key for Future Combat System's Success, GAO-06-478T (Washington D.C.: March 1, 2006). Defense Acquisitions: DOD Management Approach and Processes Not Well-Suited to Support Development of Global Information Grid, GAO-06-211, (Washington D.C.: January 30, 2006). Defense Acquisitions: DOD Has Paid Billions in Award and Incentive Fees Regardless of Acquisition Outcomes, GAO-06-66, (Washington D.C.: December 19, 2005). Unmanned Aircraft Systems: Global Hawk Cost Increase Understated in Nunn-McCurdy Report, GAO-06-222R, (Washington D.C.: December 15, 2005) DOD Acquisition Outcomes: A Case for Change, GAO-06-257T, (Washington D.C.: November 15, 2005). Defense Acquisitions: Progress and Challenges Facing the DD(X) Surface Combatant Program GAO-05-924T. (Washington D.C.: 07/19/2005). Defense Acquisitions: Incentives and Pressures That Drive Problems Affecting Satellite and Related Acquisitions. GAO-05-570R. (Washington D.C.: 06/23/2005). Defense Acquisitions: Resolving Development Risks in the Army's Networked Communications Capabilities is Key Fielding Future Force. GAO-05-669 (Washington D.C.: 06/15/2005). Progress of the DD(X) Destroyer Program. GAO-05-752R. (Washington D.C.: 06/14/2005) Tactical Aircraft: F/A-22 and JSF Acquisition Plans and Implications for Tactical Aircraft Modernization. GAO-05-519T. (Washington D.C.: 04/06/2005). Defense Acquisitions: Assessments of Selected Major Weapon Programs. GAO-05-301 (Washington D.C.: 03/31/2005). Defense Acquisitions: Future Combat Systems Challenges and Prospects for Success. GAO-05-428T. (Washington D.C.: 03/16/2005). Defense Acquisitions: Changes in E-10A Acquisition Strategy Needed Before Development Starts. GAO-05-273 (Washington D.C.: 03/15/2005). Defense Acquisitions: Future Combat Systems Challenges and Prospects for Success. GAO-05-442T (Washington D.C.: 03/15/2005). Tactical Aircraft: Air Force Still Needs Business Case to Support F/A-22 Quantities and Increased Capabilities. GAO-05-304. (Washington D.C.: 03/15/2005). Tactical Aircraft: Opportunity to Reduce Risks in the Joint Strike Fighter Program with Different Acquisition Strategy. GAO-05-271. (Washington D.C.: 03/15/2005). Tactical Aircraft: Status of F/A-22 and JSF Acquisition Programs and Implications for Tactical Aircraft Modernization. GAO-05-390T (Washington D.C.: 03/03/2005). Defense Acquisitions: Plans Need to Allow Enough Time to Demonstrate Capability of First Littoral Combat Ships. GAO-05-255 (Washington D.C.: 03/01/2005). Defense Acquisitions: Improved Management Practices Could Help Minimize Cost Growth in Navy Shipbuilding Programs. GAO-05-183 (Washington D.C.: 02/28/2005). Unmanned Aerial Vehicles: Changes in Global Hawk's Acquisition Strategy Are Needed to Reduce Program Risks. GAO-05-06 (Washington D.C.: 11/05/2004). 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) F-22A and Joint Strike Fighter (JSF) programs aim to replace many of the Department's aging tactical fighter aircraft--many of which have been in DOD's inventory for more than 20 years. Together, the F-22A and JSF programs represent a significant investment for DOD--currently estimated at almost $320 billion. GAO has reported on the poor outcomes in DOD's acquisitions of tactical aircraft and other major weapon systems. Cost and schedule overruns have diminished DOD's buying power and delayed the delivery of needed capabilities to the warfighter. Last year, GAO testified that weaknesses in the F-22A and JSF programs raised questions as to whether DOD's overarching tactical aircraft recapitalization goals were achievable. GAO is providing updated testimony on (1) the extent to which the current F-22A and JSF business cases are executable, (2) the current status of DOD's tactical aircraft recapitalization efforts, and (3) potential options for recapitalizing the air forces as DOD moves forward with its tactical aircraft recapitalization efforts. The future of DOD's tactical aircraft recapitalization depends largely on the outcomes of the F-22A and JSF programs--which represent about $245 billion in investments to be made in the future. Both programs continue to be burdened with risk. The F-22A business case is unexecutable in part because of a 198 aircraft gap between the Air Force requirement and what DOD estimates it can afford. The JSF program, which has 90 percent of its investments still in the future, plans to concurrently test and produce aircraft thus weakening DOD's business case and jeopardizing its recapitalization efforts. It plans to begin producing aircraft in 2007 with less than 1 percent of the flight test program completed. DOD's current plan to buy about 3,100 new major tactical systems to replace its legacy aircraft represents a 33-percent reduction in quantities from original plans. With reduced buys and delays in delivery of the new systems, costs to keep legacy aircraft operational and relevant have increased. While the Secretary of Defense maintains that continued U.S. air dominance depends on a recapitalized force, DOD has not presented an investment strategy for tactical aircraft systems that measures needs, capability gaps, alternatives, and affordability. Without such a strategy, DOD cannot reasonably ensure it will recapitalize the force and deliver needed capabilities to the warfighter within cost and schedule targets. As DOD moves forward with its efforts to recapitalize its tactical aircraft, it needs to rethink the current business cases for the F-22A and JSF programs. This means matching needs and resources before more F-22A aircraft are procured and ensuring the JSF program demonstrates acceptable aircraft performance before it enters initial production.
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The Sentencing Reform Act of 1984 (1) created the U.S. Sentencing Commission to develop a set of federal sentencing guidelines,(2) replaced parole with supervised release for postprison supervision, and (3) made probation a separate sentence. Prior to these changes, federal offenders could be sentenced to a term of probation as part of a suspended prison sentence, meaning that they were released from custody but had to routinely report to officers of the court (probation officers), or be sentenced to prison terms. Offenders who exhibited good behavior while in prison could be released on parole after serving as little as one-third of their prison terms. The United States Parole Commission (USPC) determined whether and when an offender was granted parole. The Sentencing Reform Act of 1984 made probation a separate sentence and restricted an offender's eligibility for probation. The sentencing guidelines, in implementing the provisions of the act, are more detailed and provide judges less sentencing discretion than the system they replaced. The implementation of the sentencing guidelines, laws providing mandatory minimum sentences for certain offenses (mostly drug and violent offenses), and laws broadening federal criminal jurisdiction have together resulted in a steadily growing federal prison population. From fiscal years 1990 through 1996, the number of inmates in federal prisons grew from 58,021 to 94,695. Under the sentencing guidelines, offenders sentenced to a prison term of 1 year or more usually also receive a term of postprison supervision (about 1 to 5 years) called supervised release. Offenders must serve at least 85 percent of their prison terms before they are eligible for supervised release. The primary goals of community supervision are to control risk to the community, enforce conditions of supervision, and provide for correctional treatment. Appendix II includes flowcharts of the supervision process that depict how offenders under each type of supervision enter and proceed through the community supervision program. Probation officers are responsible for supervising offenders on community supervision. They are to evaluate each offender's needs and prepare a supervision plan, enforce any conditions of release, monitor offender behavior, and report violations to the courts. According to AOUSC officials, the higher the perceived risk to the community, the more intensive the supervision, including more frequent contacts with the offender. Further, AOUSC has also indicated that risk is associated with several factors. These factors include the extent to which offenders had serious criminal histories, had special conditions imposed on their supervision, or had violated the terms of their supervision. As noted earlier, AOUSC also believes that postprison offenders generally require more intensive supervision because these risk factors are more prevalent among this population. Some offenders under community supervision may have special conditions placed on them. For example, offenders may be placed on home confinement with or without electronic monitoring; be required to participate in drug, alcohol, or mental health treatment or counseling programs; be required to provide community service; or receive any combination of these conditions. These special conditions may be imposed by the judge at sentencing, or the probation officer may determine that such special conditions are required when preparing the supervision plan or when monitoring the offender's behavior while on community supervision. If the probation officer determines that such conditions are necessary, the probation officer may petition the court to impose special conditions during the course of the offender's supervision. According to AOUSC, offenders are removed from supervision because they violate the terms of their supervision or their term (1) expires, (2) terminates early, or (3) terminates for various noncriminal-related reasons, such as death or medical conditions. AOUSC classifies violations of supervision as technical, minor, or major. A technical violation is a violation of the conditions of supervision other than the conviction for a new offense. A minor violation is a conviction for a minor offense, such as disorderly conduct or drunken driving, for which the sentence is imprisonment for 90 days or less, probation for 1 year or less, or a fine. A major violation is the involvement in or conviction for a new major offense, including absconding from custody, having been arrested on another charge, or convicted and sentenced to more than 90 days of imprisonment or more than 1 year of probation. Offenders who violate their release conditions may be imprisoned, particularly if they have been convicted of a new offense, or may be sanctioned in other ways, such as having more restrictive conditions placed on their release. Violations generally create additional work for probation officers. First, when an offender violates one or more of his or her release conditions, the probation officer may petition the court to impose more restrictive release conditions, such as more frequent drug testing, which the probation officer must monitor. The probation officer may, at his or her option, choose to file a violation report with the court and petition the court to have the violator removed from community supervision and incarcerated. If the officer chooses to petition the court for removal (through the local U.S. Attorney's office), the officer must prepare a violation report and usually must appear at a court hearing to consider the probation officer's request. Although the total federal population on community supervision grew only 10 percent from fiscal years 1990 through 1996 (compared to a 63 percent growth in the federal prison population), two noteworthy changes occurred in that population, both caused by the implementation of the Sentencing Reform Act of 1984. First, the percentage of offenders sentenced directly to community supervision (probation) decreased, and the percentage of offenders sentenced to prison terms with required supervised release increased. Second, the percentage of offenders released from prison to parole also decreased, reflecting the decrease in the number of offenders who were sentenced under the preguidelines system. BOP estimates project that these trends will continue and that a larger proportion of offenders who could pose a higher risk of recidivism are scheduled to be released to community supervision over the next 5 years. As shown in figure 1, during fiscal years 1990 through 1996, the total federal population under community supervision grew by about 10 percent, from 80,592 to 88,966. During this period, the probation population decreased by about 35 percent; the parole population declined about 59 percent; and the supervised release population increased about 648 percent. Overall, the parole and supervised release--i.e., postprison--population rose 94 percent in the period. Additionally, as figure 2 shows, the distribution of this population for the three major types of supervision--probation, parole, and supervised release--changed considerably. Despite the growth in the community supervision population, figure 3 shows that the distribution of offenders on supervision for the major crime types--violent, white collar, drugs, and all other--did not change significantly. Between fiscal years 1992 and 1996, the largest group of convicted offenders on supervision were drug offenders. These offenders increased moderately from about 32 percent of the total supervision population in fiscal year 1992 to over 38 percent in fiscal year 1996. Offenders convicted of white collar crimes remained relatively unchanged at between 27 and 28 percent of the supervision population. Together, offenders in these two crime categories accounted for more than 60 percent of all offenders on supervision for each year during this period. BOP provided us with estimates of the number of offenders serving prison terms as of September 30, 1996, who are scheduled to be released from prison to community supervision between fiscal years 1997 and 2001. These estimates include those offenders sentenced prior to the sentencing guidelines who are scheduled to enter the parole program and those offenders who were sentenced under the sentencing guidelines and are to enter the supervised release program. BOP provided its estimates of release by the major offense category for which the offender was originally convicted and sentenced--drugs, violent, homicide, white collar, and all others. As shown in table 1, BOP estimates that the number of offenders released on parole will continue to decline, while the number of offenders released to the supervised release program will continue to increase. In fiscal years 1997 through 2001, BOP expects that about 55,700 of the offenders who were inmates as of September 30, 1996, will be released to a term of supervised release and about 5,200 released on parole. Over 70 percent of these approximately 61,000 offenders were convicted of violent or drug-related crimes. As previously noted, AOUSC has indicated that workload can be affected by the extent to which offenders had serious criminal histories. A 1993 BOP report on a sample of inmates released from BOP prisons suggests that an offender's criminal history score is related to the risk of recidivism. The higher the criminal history category the greater the risk of recidivism. Criminal history is also one of the variables in the risk-assessment scale probation officers use to determine the level of supervision an offender on community supervision may require. The inmates released from BOP prisons in fiscal years 1997 through 2001 may include a greater number of higher risk offenders than the population released through fiscal year 1996. Since the sentencing guidelines apply to all offenses committed on or after November 1, 1987, only a very small percentage of offenders have been sentenced under the preguidelines system in the 1990s. Offenders sentenced under the preguidelines system may apply for release on parole after serving one-third of their sentence. Thus, offenders remaining in prison in fiscal year 1996 or later under the preguidelines system are likely to be those who have received long sentences, which are usually associated with more serious crimes; have been denied parole because of behavioral problems in prison that may heighten the risk they pose to the community once released; or both. According to AOUSC officials, such offenders may pose a higher risk of recidivism than offenders with shorter sentences who were released after serving one-third of their sentences. Offenders sentenced under the guidelines and released after fiscal year 1996 are likely to include more offenders with extensive criminal histories who have received longer sentences and who thus may pose a higher risk of recidivism than those released before fiscal year 1996. Under the guidelines, offenders are assigned a criminal history category based on the extent of their prior criminal behavior. The categories range from I, for those with virtually no prior criminal history, to VI, for those with the most serious criminal history. Offenders with more serious criminal histories generally receive longer sentences for the same offense than those with less extensive criminal histories. Figure 4 shows that, in fiscal years 1991 through 1995, the number of offenders sentenced in the three most serious criminal history categories--IV, V, and VI--grew at greater rates than did the number of offenders with less serious criminal histories. Offenders with special conditions may be placed on home confinement with or without electronic monitoring; be required to participate in drug, alcohol, or mental health treatment or counseling programs; be required to perform community service; or receive any combination of these conditions. As discussed earlier, AOUSC has indicated that workload can be affected by the extent to which offenders had special conditions imposed on their terms of supervision. Figure 5 shows that, between fiscal years 1992 and 1996, the number of offenders with special conditions remained relatively stable. In addition, as shown in greater detail in table 2, the proportion of the total supervision population with special conditions remained relatively stable within a range of 42 to 46 percent during the same period. For each year in this 5-year period, the data showed that about 60 percent or more of the offenders with special conditions received treatment for drug or substance abuse. As shown in table 3, the proportion of the total supervision population with special conditions varied within the three major types of supervision. Specifically, probation offenders with special conditions increased from about 39 to 50 percent. The percentage on parole decreased from about 44 to 41 percent, while those on supervised release declined from 45 to about 37 percent. The percentage of the parole and supervised release--i.e., postprison--population with special conditions decreased from about 45 to 38 percent. Offenders can be removed from supervision because (1) they violate the terms of their supervision; or because (2) their term expires, they terminate early, or they terminate for noncriminal-related reasons. As noted earlier, AOUSC has indicated that workload can be affected by the extent to which offenders violate their terms of supervision. Figure 6 shows that, between fiscal years 1990 and 1996, the number of offenders removed from supervision for violating the terms of their supervision increased from 7,360 to 8,922 (about 21 percent). As shown in more detail in table 4, in fiscal years 1990 through 1996, from 9 to 10 percent of the total federal supervision population were removed from their supervision annually because they had violated their terms. During the same period, from about 28 to 31 percent of the total population were removed from supervision without a violation. Table 5 shows that, in fiscal years 1990 through 1996, violation ratesremained relatively constant for probation and parole offenders, from 6 to 7 and 14 to 18 percent, respectively. After an initial jump from over 5 to nearly 12 percent from fiscal year 1990 to 1992, the violation rate for supervised release offenders remained relatively unchanged at about 11 percent. Parole and supervised release--i.e., postprison--offenders had violation rates over 60 percent higher than that for offenders on probation. Offenders can be removed from supervision for committing one of three types of violations: major, minor, or technical. In fiscal years 1990 through 1996, a higher percentage of postprison--i.e, parole and supervised release--offenders were removed for major violations (from 23 to 29 percent) than were offenders on probation (from 16 to 18 percent). Overall, technical violations accounted for an average of about 70 percent of all offenders removed for violations annually in fiscal years 1990 through 1996. During the same period, an average of about 8 percent were removed for committing a minor violation, while an average of 23 percent were removed for committing a major violation. On July 17, 1997, AOUSC provided us with written technical comments and clarifications on a draft of this report, which we incorporated into the report where appropriate. AOUSC generally agreed with the contents of the draft report. We are providing copies of this report to the Director of AOUSC and other interested parties. Copies will be made available to others upon request. The major contributors to this report are listed in appendix IV. Please contact me on (202) 512-3610 if you or your staff have any questions. We initiated this assignment to provide Congress with information on the size and growth of the community supervision population as a result of the implementation of the Sentencing Reform Act of 1984. Our overall objective was to identify changes in the federal community supervision population that could affect probation officers' workload. Specifically, we determined trends in (1) the growth of the total supervision population and any changes in the composition of that population by type of supervision; (2) the number of offenders who had special conditions imposed on their term of supervision, such as home confinement or drug treatment; and (3) the number of persons who were removed from supervision for violating the terms of their supervision. To develop information on the growth trends in the supervision population, we obtained AOUSC annual reports for fiscal years 1990 through 1996 and other documents. The data for these reports were derived from AOUSC's Federal Probation Supervision Information System. We also analyzed AOUSC statistics on the number of individuals currently under supervision, the number removed from supervision--with and without a violation--and the principal reasons for their removal, for fiscal years 1990 through 1996. We chose fiscal year 1990 as our base year because it was the first full year in which the federal sentencing guidelines were implemented on a national basis. To obtain some data on potential future trends in the postprison community supervision population, we reviewed BOP's estimates of the number of inmates who were expected to be released to community supervision in fiscal years 1997 through 2001. BOP estimated release dates for inmates in its prisons as of September 30, 1996. BOP provided these estimates by major offense for inmates sentenced under the preguidelines (parole) and guidelines (supervised release) sentencing rules. These data did not include estimates of the number of inmates who may be sentenced to prison and subsequently released in the years 1997 through 2001. BOP could not provide estimates of this population until its revision of its prison population projection model is complete. BOP said that these data were derived from its management information system, SENTRY. In addition, we analyzed data from the U.S. Sentencing Commission's annual reports for fiscal years 1991 through 1995 on the average length of imprisonment for offenders sentenced, by criminal history category.These data were derived from the Commission's MONFY data file, which contains sentencing information on offenders sentenced under the guidelines. To describe the special conditions that may be imposed on supervisees, we analyzed information provided by AOUSC on special conditions for fiscal years 1992 through 1996, as well as the per diem cost of administering each condition. This information included the number of offenders who had received each type of treatment or who had been placed on electronic monitoring or community service in each of these years. It is possible for an offender to be counted in more than one of these categories, but the data AOUSC provided did not identify how many offenders had more than one special condition or the duration for which a special condition was imposed. To obtain information on the number of offenders removed from supervision with and without violations, we obtained and analyzed AOUSC annual reports on removals. We did not conduct an independent assessment of the databases or of the policies and procedures used to assess and ensure their reliability and validity. Community supervision consists of three major programs: probation, parole, and supervised release. Persons on probation have usually been sentenced directly to probation at sentencing and may begin their term of probation immediately after sentencing. Persons on parole and supervised release enter community supervision after serving a term of imprisonment. The following sections describe how individual offenders proceed through the community supervision program. Prior to the Sentencing Reform Act of 1984, a term of probation operated as a suspended sentence. Under the terms of the act, as reflected in the federal sentencing guidelines, probation is a separate sentence that may have elements of punishment, incapacitation, deterrence, and correctional treatment. Special conditions that may be imposed as part of a sentence of probation include home confinement with or without electronic monitoring; participation in drug, alcohol, or mental health treatment or counseling programs; community service; or any combination of these conditions. The judge may impose some special conditions as part of the sentence, and the probation officer may impose additional conditions as part of the supervision plan prepared for each offender. In addition to special conditions, there are mandatory conditions of supervision that apply to all offenders. These include prohibitions on (1) committing another federal, state, or local crime during the term of probation; (2) possessing a firearm; and (3) possessing controlled substances. In addition, the judge may order the offender to pay a fine and/or restitution as part of the sentence. As figure II.1 indicates, if the offender does not violate the conditions set by the court or imposed by the probation officer during his or her term of probation, the offender is to be released at the end of the term. Court sets term of probation and conditions of supervision conditions? If, however, the offender violates a condition or a set of conditions, the probation officer may report the offense to the court and recommend that probation be revoked and the offender be incarcerated. The court then determines whether the offender will be incarcerated. In the case of a new felony or misdemeanor, the offender may be tried for a new crime. Not all violations lead to court hearings. For example, instances of noncompliance may be addressed initially through an administrative case conference involving the deputy chief probation officer or supervising probation officer, the probation officer, and the offender. The conference is to involve a complete review of the case and consideration of possible interventions or sanctions, including community service, drug or alcohol in-patient treatment, and electronically monitored home confinement. For these sanctions to be imposed, the offender must waive his or her right to counsel and a hearing. Figure II.2 shows that offenders imprisoned under the presentencing guidelines system can be released on parole after serving a portion of their prison terms. These offenders committed crimes prior to November 1, 1987. Offenders who exhibit good behavior while in prison may be released on parole after serving as little as one-third of their prison terms. The United States Parole Commission (USPC) determines whether and when an offender will be granted parole. Completes at least 1/3 sentence Offender paroled? violates conditions? As is the case with probation, mandatory and special conditions may be imposed on parolees. Offenders convicted of crimes committed before November 1, 1987, may receive a sentence of incarceration followed by a period of parole. Offenders receiving prison terms must complete a minimum of one-third of the sentence before they are eligible for parole to the community. Some offenders are not paroled to the community because the USPC deems them to be a risk to the community. These offenders are to remain in prison until they have served their entire sentence, less a minimum period for community supervision. They are then released to the community under mandatory release. After an offender has served one-third of the sentence, USPC may approve parole and impose special and mandatory conditions. If the offender does not violate any of the conditions, he or she completes supervision. If, however, the offender violates a condition or a set of conditions, USPC can either modify the conditions of supervision by making them more restrictive or revoke parole and have the offender reincarcerated. In the event the offender has committed a new crime, he or she may be prosecuted for the offense. Offenders who committed offenses on or after November 1, 1987, may be given both a term of imprisonment and a term of supervised release by the sentencing judge. The offender serves his or her entire prison sentence, less a maximum reduction of 54 days per year for satisfactory behavior. As in the cases of probation and parole, the supervised release offender is also assigned mandatory and, if needed, special conditions. Figure II.3 shows that mandatory and special conditions may be imposed by the sentencing judge, as well as by the probation officer, in cases where the need for a special condition has arisen after sentencing. The conditions imposed by the probation officer may have been specified in the prerelease plan developed by BOP prior to the offender's release from prison. The probation officer may also determine that special conditions are required when preparing the supervision plan or when monitoring the offender's behavior while on supervised release. Offender serves term of supervised release violates conditions? Violation 1. Minor 2. Major 3. Technical violation? If the offender does not violate any of the conditions, he or she can complete supervision as planned. If, however, he or she violates the conditions, the probation officer can exercise some discretion in either modifying the special conditions or referring the case to the court for disposition. Unlike parole, where revocation and reincarceration decisions can be made by USPC, in the case of supervised release, these decisions are made by the district court. In the event the offender has committed a new crime, he or she may be prosecuted for the offense. As previously outlined in the discussion of probation, not all infractions are reported to the courts or result in revocation of supervision. The probation officer has some discretion in deciding whether to refer a case to the court or to an administrative case conference. As shown in table III.1, the federal community supervision population rose by about 10 percent between fiscal years 1990 and 1996. The corresponding population growth in the federal prison system was about 63 percent, from 58,021 in fiscal year 1990 to 94,695 in fiscal year 1996. Table III.2 shows that, from fiscal years 1990 to 1996, the probation and parole populations decreased about 35 and 59 percent, respectively; while the supervised release population increased 648 percent. Overall, the postprison population increased 94 percent during the same period. Table III.3 shows the distribution of offenders on community supervision for the major crime types. As shown, drug offenders, who accounted for the largest number of offenders on community supervision, increased from nearly 32 percent of the total community supervision population in fiscal year 1992 to about 38 percent in fiscal year 1996. Table III.4 shows the number of offenders sentenced each year, by criminal history category, in fiscal years 1991 through 1995. As shown, the number of offenders sentenced each year in the three most serious criminal history categories (IV, V, and VI) grew at greater rates than those for offenders with lesser criminal histories. Number of offenders sentenced by criminal history category I (0 or 1) II (2 or 3) III (4-6) IV (7-9) V (10-12) VI (13 or more) A form of release from prison mandated by statute, which has been phased out by the Sentencing Reform Act of 1984. Mandatory release can be distinguished from either probation or parole in that mandatory releasees essentially are denied regular parole because they are dangerous offenders or have committed serious acts. The statute provided for release 180 days prior to the expiration of the prisoner's sentence to allow for a minimal period of supervision. A form of early release from a military prison through the exercise of discretion by the United States Parole Commission (USPC) and the operation of the good-time laws that were in effect before the Sentencing Reform Act of 1984. A form of early release from prison through the exercise of discretion by the USPC and the operation of the good-time laws that were in effect before the Sentencing Reform Act of 1984. Parole can be distinguished from either probation or supervised release in that parolees are released from custody early but remain in the legal custody of the Attorney General while in the community. If parole is revoked, the parolee may be returned to custody to continue serving the sentence. Prisoners can be released again to parole and reincarcerated until the maximum sentence imposed has been served. A sentence to supervision in the community by a probation officer. In addition to some mandatory conditions, other conditions may apply. The maximum term of probation supervision varies by offense class. An additional term of supervision, which has been phased out by the Sentencing Reform Act of 1984. A term of special parole begins upon completion of any period on parole or mandatory release supervision from the regular sentence. If the prisoner is released by expiration of good time without any supervision, the special parole term begins upon such release. Following completion of the offender's term of imprisonment, a period of supervision in the community imposed by a judge at the time of sentencing. In addition to some mandatory conditions, other conditions may apply. Under the sentencing guidelines, the court must order supervised release to follow any term of imprisonment that exceeds 1 year or if required by a specific statute. The court may order supervised release to follow imprisonment in any other case. The maximum term of supervised release varies by offense class. Offenders on supervised release are supervised by probation officers. 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 reviewed the trends in the number of federal offenders serving terms of community supervision during fiscal years 1990 through 1996, focusing on: (1) the growth of the total supervision population and any changes in the composition of that population by type of supervision; (2) the number of offenders who had special conditions imposed on their terms of supervision, such as home confinement or drug treatment; and (3) the number of persons who were removed from supervision for violating the terms of their supervision. GAO noted that: (1) the total population of federal offenders under community supervision rose 10 percent during fiscal years 1990 and 1996; (2) the most notable change in the mix of this population occurred in the percentage of offenders serving a term of community supervision following a prison term; (3) specifically, the probation population decreased about 35 percent, while those on postprison supervision rose 94 percent; (4) the increase in the postprison supervision population is entirely due to the large increase in the number of offenders on supervised release; (5) during fiscal years 1991 through 1995, the number of offenders sentenced with serious criminal histories grew at a significantly greater rate than did those with less serious criminal histories; (6) further, available data suggest that inmates released from the Bureau of Prisons prisons in fiscal years 1997 through 2001 may include a greater number of high-risk offenders than did the population released through fiscal year 1996; (7) the total number of offenders with special conditions remained relatively stable between fiscal years 1992 and 1996; (8) in addition, the total number of offenders removed from supervision for violating their terms of supervision increased by nearly 18 percent between fiscal years 1990 and 1996; (9) to the extent that the trends continue in the: (a) mix of offenders under federal supervision; (b) number of offenders sentenced with more serious criminal histories; and (c) number of offenders removed from supervision due to violations, the workload of probation officers would likely increase; and (10) if the trend in the number of offenders with special conditions remains stable, it would not likely affect the workload of probation officers.
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Ten federal agencies participate in the SBIR program. Five of them--DOD, the National Aeronautics and Space Administration (NASA), the Department of Health and Human Services and, particularly, its National Institutes of Health (NIH), Department of Energy (DOE), and the National Science Foundation (NSF)--provided over 95 percent of SBIR funds in fiscal year 1996. (See table 1.) DOD provides over 50 percent of SBIR funding. Each agency manages its own program, while SBA plays a central administrative role, such as issuing policy directives and annual reports for the program. The Small Business Innovation Development Act of 1982 required that agencies with extramural R&D budgets of $100 million or more set aside not less than 0.2 percent of that amount for the SBIR program and provided for annual increases up to a ceiling of not less than 1.25 percent of the agencies' budgets. The act provided for a three-phase program. Phase I is intended to determine the scientific and technical merit and feasibility of a proposed research idea. Work in phase II further develops the idea, taking into consideration such things as the idea's commercialization potential. Phase III generally involves the use of nonfederal funds for the commercial application of a technology or non-SBIR federal funds for continued R&D under government contracts. The Small Business Research and Development Enhancement Act of 1992 reauthorized the SBIR program through fiscal year 2000. The act emphasized the program's goal of increasing the private sector's commercialization of technologies and provided for further incremental increases in SBIR funding up to not less than 2.5 percent of agencies' extramural R&D budgets by fiscal year 1997. Moreover, the act directed SBA to modify its policy directive to reflect an increase in funding for eligible small businesses, that is, businesses with 500 or fewer employees. The funding was increased from $50,000 to $100,000 for phase I and from $500,000 to $750,000 for phase II, with adjustments once every 5 years for inflation and changes in the program. The agencies' SBIR officials reported that they have adhered to the act's requirements that they not use SBIR funds to pay for the administrative costs of the program, such as salaries and expenses for support services used in processing awards. However, they added that the funding restriction has limited their ability to provide some needed administrative support. For example, DOD reported that its laboratories and field organizations do not have the necessary funds to provide personnel to act as mentors to their SBIR contractors or engage in activities that could possibly increase the program's success in phase III. Similarly, NIH, NASA, and NSF have also reported problems in providing outreach for current and potential SBIR participants because of this funding restriction. According to NSF's SBIR official, this funding restriction has resulted in NSF's inability to provide SBIR participants with much-needed training in business skills. DOE has reported experiencing administrative problems that are attributed to cuts in the Department's administrative budget. DOE's SBIR officials reported that further cuts, without the lifting of the restrictions on the use of SBIR funds, would diminish their ability to complete award selections in a more timely fashion, respond to the needs of the program's constituents, and ensure that high-quality research is being performed. Although program officials believe that their agencies are adhering to statutory funding levels, some expressed concern because they feel that agencies are using different interpretations of the "extramural budget" definition. This may lead to incorrect calculations of their extramural research budgets. For example, according to DOD's SBIR program manager, all eight of DOD's participating military departments and defense agencies that make up DOD's SBIR program have differing views on what each considers an extramural activity and on the appropriate method for tracking extramural R&D obligations. As a result, the program and budget staff have not always agreed on the dollar amount designated as the extramural budget. Of the five agencies we reviewed, only two--NSF and NASA--have recently audited their extramural R&D budgets. DOD, NIH, and DOE have not audited their extramural R&D budgets nor do they plan to conduct any audits in the near future. Both NSF and NASA audited their extramural R&D budgets in fiscal year 1997. NSF's audit, which was performed by its Office of Inspector General (OIG), concluded that NSF was overestimating the size of its extramural R&D budget by including unallowable costs, such as ones for education, training, and overhead. NSF estimated that these unallowable costs totaled over $100 million. The OIG audit report concluded that the SBIR portion of NSF's extramural budget should be reduced by approximately $2.5 million. The OIG audit report further concluded that by excluding these "unallowables," NSF will reduce the funds available for the SBIR program by approximately $13 million over a 5-year period. These funds could then be used for other purposes that further NSF's objectives. Likewise, NASA has completed a survey of fiscal year 1995 budget data and is currently reviewing fiscal year 1996 data at its various field centers. NASA officials say this is an effort to (1) determine the amount spent on R&D and (2) categorize the R&D as for either intramural or extramural activities. According to NASA's SBIR official, the results of these surveys will be used to establish appropriate future funding levels for the SBIR program. The SBIR officials we interviewed felt that neither the application review process nor the current funding cycles are having an adverse effect on award recipients' financial status or their ability to commercialize their projects. Specifically, DOD, DOE, NSF, and NASA stated that their respective review processes and funding cycles have little to no adverse effect on the recipients' financial status or the small companies' ability to commercialize their technologies. Furthermore, NIH believes that having three funding cycles in each year has had a beneficial effect on applicants. While the effects of the review processes and funding cycles on the recipients' financial status and ability to commercialize projects were not specifically mentioned as problems, SBIR officials did state that some recipients had said that any interruption in funding awards, for whatever reason, affects them negatively. One SBIR program manager who did think that these were problems, stated that at DOD, most award recipients often have no way of paying their research teams during such a funding gap. As a result, ongoing research may be delayed, and the "time-to-market"--that is the length of time from the point when research is completed to the point when the results of the research are commercialized--may be severely impaired, thus limiting a company's commercial potential. The DOD official said that time-to-market is of paramount importance in most high-tech industries--so much so, that a new product that reaches the market a year late may be partly or mostly obsolete. Most of the participating SBIR agencies have established special programs and/or processes in an effort to mitigate any adverse effect(s) caused by funding gaps. One such effort is the Fast Track Program, employed at DOD, whereby phase I award recipients who are able to attract third-party funding are given the highest priority in the processing of phase II awards. At DOE and NIH, phase I award recipients are allowed to submit phase II applications prior to the completion of phase I. NASA has also taken steps to lessen any adverse impact on small businesses while applications are being processed. For example, NASA has established an electronic SBIR management system to reduce the total processing time for awards and is currently exploring the possibility of instituting a fast-track program similar to DOD's. Unlike the other participating federal agencies, NSF has not established any programs or procedures to mitigate the possible impacts of funding gaps on its SBIR participants. The reason for this, according to NSF, is that the agency's experience has been that phase I awardees, when given the choice, request more time to submit phase II applications, thus effectively increasing the funding gap by their own choosing. The third phase of SBIR projects is expected to result in commercialization or a continuation of the project's R&D. During this phase, additional federal funds or private-sector funds may be included, but additional SBIR funds may not be included. In 1991, we surveyed 2,090 phase II awards that had been made from 1984 through 1987. Our survey received responses on 1,457 awards--a response rate of 77 percent--and included questions that covered phase III activity. In 1996, DOD conducted its own survey, which closely followed our format, and also gathered information on phase III activity. DOD provides almost half of the total federal funding for SBIR, which amounted to over $500 million in fiscal year 1997. DOD's survey included all 2,828 of DOD's SBIR projects that received a phase II award from 1984 through 1992. DOD received 1,364 responses to this survey, for a response rate of 48 percent. SBA currently has a survey under way that also follows our format and will similarly cover phase III activity. This survey will include all projects that received a phase II award through 1993 and will cover all of the 10 SBIR agencies except DOD. Because of the SBA survey, we did not conduct our own; however, we did additional analyses of our 1991 survey information. We also performed our own analysis of DOD's survey data, which we obtained from the contractor. While analyzing the response data from our 1991 survey, we found that approximately half of the phase II awards were followed by phase III activity (e.g., sales or additional funding), while the other half had no phase III activity. (See table 2.) Overall, 515 respondents, or 35 percent, indicated that their projects had resulted in the sales of products or processes, while 691, or 47 percent, had received additional developmental funding. Out of total sales of $471 million that award recipients attributed to SBIR projects, most of that amount came from nonfederal customers--35 percent went to the federal government, while 64 percent was nonfederal. In the case of additional developmental funding, the ratios were somewhat consistent, since most of the funding, once again, came from nonfederal sources (76.5 percent) and the rest came from the federal government (23.6 percent). Our analysis of DOD's 1996 survey responses showed that phase III activity was occurring at rates similar to those in our survey. Our analysis of these responses showed that 653 projects, or 48 percent, reported that they were active in phase III at the time of DOD's survey, while the other half did not report any phase III activity. The respondents indicated that 442 awards, or 32 percent, had resulted in actual sales, while 588 reported that the awards had resulted in additional developmental funding. DOD's sales data broke down differently from the data in our survey results. The sales reported to DOD split almost evenly into federal (52.8 percent) and nonfederal (47.2 percent) customers. The sources of additional developmental funding were also about an even split between federal (48.8 percent) and nonfederal (51.2 percent) customers. Agencies are currently using various techniques to foster commercialization, although there is little or no empirical evidence suggesting how successful the particular techniques have been. For example, in an attempt to get those companies with the greatest potential for commercial success to the marketplace sooner, DOD has instituted a Fast Track Program, whereby companies that are able to attract outside commitments/capital for their research during phase I are given higher priority in receiving a phase II award. According to DOD's SBIR program manager, getting a product with commercial potential quickly to the marketplace is critical if the company is to be successful. The Fast Track Program not only helps speed these companies along this path but also helps them attract outside capital early and on better terms by allowing the companies to leverage SBIR funds. In 1996, for example, DOD's Fast Track participants were able to attract $25 million in outside investment. Companies that qualify for an award under the Fast Track Program can be granted a phase II contract without any interruption in funding. Additionally, DOD, in conjunction with NSF and SBA, sponsors three national SBIR conferences annually. These conferences introduce small businesses to SBIR and assist SBIR participants in the preparation of SBIR proposals, business planning, strategic partnering, market research, the protection of intellectual property, and other skills needed for the successful development and commercialization of SBIR technologies. DOE has employed a different technique aimed at increasing the commercial potential of SBIR participants. DOE's Commercialization Assistance Program provides phase II award recipients with individualized assistance in preparing business plans and developing presentation materials to potential partners or investors. This program culminates in a Commercialization Opportunity Forum, which helps link SBIR phase II award recipients with potential partners and investors. Although NSF's efforts to foster commercialization are limited in scope, the agency provides (1) its phase I award recipients with in-depth training on how to market to government agencies and (2) its phase I and II award recipients with instructional guides on how to commercialize their research. Similarly, NASA assists its SBIR participants through numerous workshops and forums that provide companies with information on how to expand their business. NASA also provides opportunities for SBIR companies to showcase their technologies to larger governmental and commercial audiences. For example, SBIR companies are encouraged to participate in NASA's American Institute of Aeronautics and Astronautics conferences, Tech 200X annual shows, Space Technology and Applications International Forum, and Oshkosh Fly In. Moreover, NASA has established an SBIR homepage on the Internet to help promote its SBIR technologies and SBIR firms and has utilized several of its publications as a way for SBIR companies to make their technologies known to broader audiences. Unlike the other SBIR agency participants, NIH does not promote any particular techniques to foster commercialization. However, NIH cites its participation in workshops and forums, including the national conferences, which have a significant focus on commercialization. Using SBA's data, we determined the number of phase I award recipients who had received 15 or more phase II awards in the preceding 5 years. (See table 3.) Throughout all of the 5-year cycles we reviewed, seven companies received multiple awards in each and every cycle. In addition, the recipient of the most SBIR awards in each cycle was the same throughout all of the cycles. We compared the commercialization rates, as well as the rates at which projects received additional developmental funding, for the multiple-award recipients with those of the non-multiple-award recipients. This comparison of the phase III activity is summarized in table 4. This analysis shows that the multiple-award recipients and the non-multiple-award recipients are commercializing at comparable rates, on the basis of the data from GAO's and DOD's surveys. According to both surveys, however, multiple-award recipients receive additional developmental funding at rates higher than those of the non-multiple-award recipients. Table 5 shows another comparison between multiple-award recipients and non-multiple-award recipients. This table shows that the average levels of sales and additional developmental funding for the multiple-award recipients are lower than those for non-multiple-award recipients. Our survey data show that multiple-award recipients' sales are, on the average, $12,000 lower than those for non-multiple-award recipients, while the levels of additional developmental funding are almost $90,000 lower for the multiple-award recipients. An analysis of DOD's data shows differences that are even more pronounced. DOD's survey data show that average sales are over $250,000 lower for the multiple-award recipients and the average levels of additional developmental funding for the multiple-award recipients are over $175,000 lower than those for the non-multiple-award recipients. A comparison between the sales recipients and the sources of additional developmental funding shows differences between our survey data and DOD's survey data with respect to multiple- and non-multiple-award recipients. (See table 6.) Our survey data show that both the multiple-award recipients and non-multiple-award recipients make approximately 35 percent of the sales to federal customers, while the remaining 65 percent goes to nonfederal customers. On the other hand, DOD's survey data show that most of the non-multiple-award recipients' sales go to federal customers (54 percent), while most of the multiple-award recipients' sales go to nonfederal customers (57 percent). Regarding the sources of additional developmental funding, our data show that a large majority of both multiple-award recipients (67 percent) and non-multiple-award recipients (77 percent) receive this funding from nonfederal sources. DOD's survey data show an almost even split, namely, that 51 percent of this funding comes from federal sources for multiple-award recipients and 49 percent for non-multiple-award recipients. When an agency funds research for a given solicitation topic where only one proposal was received, it may appear that competition was lacking. The majority of the SBIR officials we interviewed indicated that receiving a single proposal for a given solicitation topic is extremely rare. DOD reported that from 1992 through 1996, there were only three instances when a single proposal was submitted for a given solicitation topic out of 30,000 proposals that were received for various solicitations. DOD's SBIR official also stated, however, that none of the cases resulted in an award. Both DOE's and NASA's SBIR officials reported that they did not receive any single proposals for this time period. Moreover, NASA's SBIR officials stated that their policy is to revise a solicitation topic/subtopic if it receives fewer than 10 proposals or to drop the topic/subtopic from the solicitation. SBIR officials from both NIH and NSF reported that their respective solicitations are different from those of the other agencies because the solicitation topics are very broad. As a result, they receive a wide range of proposals for a given solicitation topic. The officials stated that despite the diversity of the proposals received, they still compete against one another for funding. One of the purposes of the 1992 act was to improve the federal government's dissemination of information concerning the SBIR program, particularly with regard to participation in the program by women-owned small businesses and by socially and economically disadvantaged small business. All of the agencies we reviewed reported participating in activities targeted at women-owned or socially and economically disadvantaged small businesses. For example, DOD's program managers participate each year in a number of regional small business conferences and workshops that are specifically designed to foster increased participation in the SBIR program by women-owned and socially and economically disadvantaged small businesses. All of the SBIR managers participate in national SBIR conferences that feature sessions on R&D and procurement opportunities in the federal government that are available to socially and economically disadvantaged companies. NSF encourages its program managers to take women-owned and socially and economically disadvantaged small businesses into consideration in order to promote balance in its program. According to NSF's Director of Industrial Innovation Programs, SBIR managers are directed to look not only at a company's commercialization track record but also at the company's status as a new participant, woman-owned business, or a socially and economically disadvantaged business when deciding whether to make an award. Furthermore, NASA has included all minority colleges and universities on its mailing list in an attempt to reach out to these special groups. Most of the SBIR agency officials whom we interviewed stated that they use the two listings of critical technologies as identified by DOD and the National Critical Technologies Panel in developing their respective research topics. The other agencies believe that the research being conducted falls within one of the two lists. At DOE, for example, research topics are developed by the DOE technical programs that contribute to SBIR. In DOE's annual call for topics, SBIR offices are instructed to give special consideration to topics that further one or more of the national critical technologies. DOE's analysis of the topics that appeared in its fiscal year 1995 solicitation revealed that 75 percent of the subtopics involved one or more of the national critical technology areas. Likewise, NASA's research topics, developed by its SBIR offices, reflect the agency's priorities that are originally developed in accordance with the nationally identified critical technologies. At DOD, SBIR topics that do not support one of the critical technologies identified by DOD will not be included in DOD's solicitation. Both NIH and NSF believe that their solicitation topics naturally fall within one of the lists. According to NIH's SBIR official, although research topics are not developed with these critical technologies in mind, their mission usually fits within these topics. For example, research involving biomedical and behavioral issues are very broad and can be applied to similar technologies defined by the National Critical Technologies Panel. NSF's SBIR official echoes the sentiments of NIH. According to this official, although NSF has not attempted to match topics with the listing of critical technologies, it believes that the topics, by their very nature, fall within the two lists. According to our 1991 survey and DOD's 1996 survey, SBIR projects result in little business-related activity with foreign firms. For example, our 1991 survey found that 4.6 percent of the respondents reported licensing agreements with foreign firms and that 6 percent reported marketing agreements with foreign firms. It should also be remembered that both of these agreements refer to activities where the U.S. firm is receiving benefits from the SBIR technology and still maintaining rights to the technology. Sales of the technology or rights to the technology occurred at a much lower rate--1.5 percent--according to our survey. The DOD survey showed similar results. These data showed that less than 2 percent of the respondents had finalized licensing agreements with foreign firms and that approximately 2.5 percent had finalized marketing agreements with foreign firms. Sales of the technology or the rights to the technology developed with SBIR funds occurred only 0.4 percent of the time. Although the act called for us to make recommendations on foreign interest, we are making no recommendations on tracking the extent to which foreign firms are benefiting from SBIR at this time because of the limited activity to date. A recent SBA study stated that one-third of the states received 85 percent of all SBIR awards and SBIR funds. In fiscal year 1996, the states of California and Massachusetts had the highest concentrations of awards--904 awards, for a total of $207 million, and 628 awards, for a total of $148 million, respectively. However, each state has received at least two awards, and in 1996, the total SBIR amounts received by states ranged from $120,000 to $207 million. The SBA study points out that 17 states receive the bulk of U.S. R&D expenditures, venture capital investments, and academic research funds. Hence, the study observes that the number of small high-tech firms in a state, its R&D resources, and venture capital are important factors in the distribution and success of SBIR awards. The geographic distribution of awards by state is presented in figure 1. SBIR program officials have said that they are uncertain whether the agencies are correctly adhering to the requirements for establishing their extramural research budgets. Agencies have had different interpretations, resulting in items incorrectly being excluded or included in their budgets. Current law essentially defines "extramural budget" as an agency's budget obligations that do not support activities conducted by agency employees. Therefore, there is little assurance that the SBIR program is being funded at the levels required by statute. To ensure that SBIR funding levels are correct, we recommend that the Administrator of SBA provide additional guidance to the participating agencies on how to calculate their "extramural budgets." We provided DOD, DOE, NASA, NIH, NSF, and SBA with draft copies of this report for their review and comment. We discussed the draft with SBA's Assistant Administrator for Technology, who stated that the report was balanced and that the agency agreed with our recommendation that SBA provide participating agencies with more guidance in determining extramural activities. DOD, DOE, NIH, and NSF program officials provided us with technical corrections and clarifications that we incorporated where appropriate. NASA did not provide comments in time for us to include them in our report. The information provided in this report was gathered in two ways. First, we interviewed the senior SBIR program officials at the five agencies with the largest SBIR budgets. These five agencies account for over 95 percent of all SBIR funds. They were DOD, NASA, the Department of Health and Human Services (primarily, NIH), DOE, and NSF. Second, we analyzed several databases containing information on award recipients. These databases came from the SBA, GAO, and DOD. SBA's database contained information on all SBIR phase I and phase II awards that had been granted from 1982 through 1996. We reviewed this database and revised it in several places where there appeared to be anomalous entries. We provided SBA with the revised database for review, and SBA agreed with our changes. We also analyzed the database that resulted from our 1991 survey and the database resulting from a 1996 DOD survey. These surveys were used to provide information on phase III activity and, in conjunction with SBA's database, information on multiple-award recipients' phase III activity. We performed our review from May 1997 through April 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretaries of Defense, Energy, and Health and Human Services; the Administrators of NASA and SBA; the Directors of NSF and NIH; the Director, Office of Management and Budget; and other interested parties. Please call me at (202) 512-3841 if you or your staff have any questions about this report. Major contributors to this report are listed in appendix II. Public law 102-564, dated October 28, 1992, mandated that the Comptroller General of the United States provide the Congress with a report on the Small Business Innovation Research program that containing the following: (1) a review of the progress made by federal agencies in meeting the requirements of section 9(f) of the Small Business Act (as amended by this Act), including increases in expenditures required by that subsection; (2) an analysis of participation by small business concerns in the third phase of SBIR programs, including a systematic evaluation of the techniques adopted by federal agencies to foster commercialization; (3) an analysis of the extent to which awards under SBIR programs are made pursuant to section 9(l) of the Small Business Act (as amended by section 103(h)) in cases in which a program solicitation receives only one proposal; (4) an analysis of the extent to which awards in the first phase of the SBIR program are made to small business concerns that have received more than 15 second phase awards under the SBIR program in the preceding 5 fiscal years, considering (A) the extent to which such concerns were able to secure federal or private sector follow-on funding; (B) the extent to which the research developed under such awards was commercialized; (C) the amount of commercialization of research developed under such awards, as compared to the amount of commercialization of SBIR research for the entire SBIR program; (5) the results of periodic random audits of the extramural budget of each such federal agency; (6) a review of the extent to which the purposes of this title and the Small Business Innovation Development Act of 1982 have been met with regard to fostering and encouraging the participation of women-owned small business concerns and socially and economically disadvantaged small business concerns (as defined in the Small Business Act) in technological innovation, in general, and the SBIR program, in particular; (7) an analysis of the effectiveness of the SBIR program in promoting the development of the critical technologies identified by the Secretary of Defense and the National Critical Technologies Panel (or its successor), as described in subparagraph 9(j)(2)(E) of the Small Business Act; (8) an analysis of the impact of agency application review periods and funding cycles on SBIR program awardees' financial status and ability to commercialize; and (9) recommendations to the Congress for tracking the extent to which foreign firms, or United States firms with substantial foreign ownership interests, benefit from technology or products developed as a direct result of SBIR research or research and development. Robin M. Nazzaro, Assistant Director Andrew J. Vogelsang, Evaluator-in-Charge Katherine L. Hale, Senior Evaluator John C. Johnson, Senior Evaluator Alice Feldesman, Supervisory Social Science Analyst Curtis Groves, Social Science Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a legislative requirement, GAO provided a final report on aspects of the Small Business Innovation Research (SBIR) program, focusing on: (1) agencies' adherence to statutory funding requirements; (2) agencies' audits of extramural (external) research and development (R&D) budgets; (3) the effect of the application review process and funding cycles on award recipients; (4) the extent of companies' project activity after receiving SBIR funding and agencies' techniques to foster commercialization; (5) the number of multiple-award recipients and the extent of their project-related activity after receiving SBIR funding; (6) the occurrence of funding for single-proposal awards; (7) participation by women-owned businesses and socially and economically disadvantaged businesses; (8) SBIR's promotion of the critical technologies; (9) the extent to which foreign firms benefit from the results of SBIR; and (10) the geographical distribution of SBIR awards. GAO noted that: (1) the agencies' SBIR officials reported that they have adhered to the requirements that preclude them from using SBIR finds to pay for the administrative costs of the program; (2) the program officials also believe that they are adhering to statutory funding levels for the program; (3) however, some said that they are uncertain whether the agencies are correctly adhering to the requirements for establishing their extramural research budgets; (4) only two of the five agencies that GAO reviewed have conducted audits of their extramural research budgets; (5) in 1997, the Office of Inspector General at the National Science Foundation audited the agency's extramural budget and found that it contained over $100 million of unallowable costs; (6) while most of the SBIR officials GAO interviewed said that neither the application review process nor current funding cycles have had an adverse effect on award recipients' financial status or ability to commercialize their ideas, some recipients have said that any interruption in funding awards, for whatever reason, affects them negatively; (7) the companies responding to GAO's and the Department of Defense's (DOD) surveys reported that approximately 50 percent of their projects had sales of products or services related to the research or received additional developmental funding after receiving SBIR funding; (8) the number of companies receiving multiple awards, defined here as those phase I award recipients that also received 15 or more phase II awards in the preceding 5 years, grew from 10 companies in 1989 to 17 in 1996; (9) GAO found that the funding of single-proposal awards was rare; (10) all of the agencies GAO examined reported that they engaged in activities to foster the participation of women-owned businesses or socially and economically disadvantaged small businesses; (11) all of the agencies' SBIR officials GAO interviewed felt that the listings of critical technologies are used in developing their respective research topics or that the research being conducted falls within one of the two lists; (12) GAO found little evidence of foreign firms, or U.S. firms with substantial foreign ownership interests, benefiting from technology or products developed as a direct result of SBIR-funded research; (13) SBIR awards are concentrated in the states of California and Massachusetts; (14) however, every state received at least two awards; and (15) previous studies have linked the concentration of awards to local characteristics, such as the prevalence of small high-tech firms.
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As of September 30, 2010--the end of the 2 fiscal years during which Recovery Act awards were made--NIH made more than 21,500 grant awards using Recovery Act funds. In August 2010, we reported that NIH used standard review processes--peer review or administrative review-- and standard criteria to award extramural scientific research grants with Recovery Act funding. These NIH Recovery Act grant awards were made to three grant categories. The grants varied in award size, geographic distribution, award duration, and research methods, consistent with scientific research grants funded with annual appropriations. The act required that these funds be obligated by NIH within a 2-year window--specifically, in fiscal years 2009 and 2010, though the activities funded by the grant may occur after fiscal year 2010. OMB guidance requires recipients of Recovery Act funding--including NIH Recovery Act grantees--to report on the number of jobs supported by the Recovery Act on a quarterly basis to the nationwide data collection system. OMB developed recipient reporting guidance and deployed a nationwide data collection system at www.federalreporting.gov. According to OMB guidance, a grantee's estimate of the number of jobs supported by the Recovery Act each quarter must be expressed in terms of FTEs, which are calculated as the total number of hours worked and funded by the Recovery Act within a reporting quarter divided by the quarterly hours in a full-time schedule, as defined by the recipient. According to the OMB guidance, federal agencies that award Recovery Act funds should establish internal controls to ensure data quality, completeness, accuracy, and timely reports to the www.federalreporting.gov Web site. In reviewing a selection of the reports submitted to www.federalreporting.gov by grantees of agencies across the Department of Health and Human Services (HHS), the HHS Office of Inspector General found that HHS had processes in place for reporting the use of Recovery Act funds. NIH officials also reported that HHS assesses the quality of reports filed by NIH Recovery Act grantees. For example, using data assessments performed by NIH, HHS assesses the quality of the data reported by Recovery Act grantees. NIH and NIH Recovery Act grantees collect information about the FTEs supported by NIH Recovery Act funding as well as information on the other impacts of this funding from a variety of sources. Specifically, NIH collects information about FTEs supported by the Recovery Act from the www.federalreporting.gov Web site. NIH grantees, including NIH Recovery Act grantees, also submit annual progress reports to NIH that include information such as the goals and progress of their research. NIH is also participating in the development of a multiagency collaboration (called Star Metrics) to track the employment, scientific, and economic impacts of its funded research projects--including Recovery Act grants. In addition, NIH gathers information from principal investigators working on priority research areas and prepares publicly available reports (known as Investment Reports) about the potential scientific impacts of NIH- funded research. NIH Institutes and Centers (IC) select the topics featured in these reports based on (1) the importance of the topic area within the body of research funded by the IC, (2) the level of funding provided by the IC to the topic area, and (3) the level of public interest in the topic area. NIH grantees also collect information about the jobs as well as other impacts of NIH grants, including those funded by the Recovery Act, using payroll records, and effort reporting systems--such as time cards, other internal accounting records, and publications. Data reported by all NIH Recovery Act grantee institutions to the nationwide data collection system and available to NIH indicate that the number of FTEs supported by NIH Recovery Act funds generally increased from December 2009 through September 2010, then generally remained steady from December 2010 through June 2011--the most recent quarters for which data are available. As shown in figure 1, the number of FTEs supported by NIH Recovery Act funding ranged from about 12,000 in the reporting quarter ending December 2009 to about 21,000 in the quarter ending in June 2011. According to NIH officials, Recovery Act funds could eventually support a total of approximately 54,000 FTEs. This figure represents NIH's estimated total of FTEs that could be supported throughout the Recovery Act. According to NIH officials, this estimate is projected based on the quarterly expenditure of funds reported by grantee institutions and the projected number of FTEs that NIH expects that these funds could support over the life of the Recovery Act. NIH expects that the Star Metrics program will provide additional information about the number and types of jobs funded by the Recovery Act. NIH officials reported that the Star Metrics program is an ongoing initiative and that the program is expected to release preliminary results regarding jobs in 2012. Like other NIH Recovery Act grantee institutions, data reported by our five grantee institutions also showed a general increase in FTEs. Specifically, the five institutions combined reported almost 1,000 FTEs in the quarter ending in December 2009, increasing to almost 2,000 supported FTEs in the most recent quarter for which data are available that ended in June 2011. (See fig. 2). Through responses to our data collection instrument 50 selected principal investigators at five grantee institutions provided additional information explaining how the Recovery Act funding supported FTEs. Nearly 30 percent of the 50 selected principal investigators reported that the NIH funding they received supported new positions, and about half of the principal investigators reported that the funding they received allowed them to avoid reductions in the number of employees at their institution or avoid a reduction in the number of hours worked by current employees. For example, according to the selected principal investigators, 29 percent of the jobs supported by NIH Recovery Act funding at the five grantee institutions were new employees hired by the institution using Recovery Act funding, and 54 percent were current employees. One principal investigator reported using NIH Recovery Act funding to hire more than 10 employees, many of whom had recently been laid off or had been out of work for several months. According to selected principal investigators, a majority (54 percent) of the job positions supported by NIH Recovery Act funds were parttime and the mean number of hours worked per week for all supported positions was about 20, including for example, a mean of 9 hours per week for professors and 35 hours per week for students pursuing postgraduate degrees. (See app. II for more descriptive information about the FTEs supported by NIH Recovery Act funding.) NIH officials currently receive some information reported by NIH grantees about other impacts of NIH's Recovery Act funding, and NIH is participating in a program that NIH officials expect could help track these other impacts. In response to our data collection instrument, two-thirds of our 50 selected principal investigators--who direct research at the grantee institutions--reported that the Recovery Act funding received in fiscal years 2009 and 2010 was used to purchase research supplies and equipment and lab testing services. In addition, the majority of our 50 selected principal investigators and NIH also reported preliminary results from research projects funded by the Recovery Act. NIH officials we interviewed said that principal investigators--who direct research at the grantee institutions--including those which received Recovery Act funding--currently report some information to NIH about the other impacts of NIH-funded research. This information generally includes purchases made by the principal investigators, as well as preliminary research results submitted to NIH in their annual progress reports. NIH is participating in the Star Metrics program--a multiagency collaboration currently involving about 77 grantee institutions--to track, among other things, the scientific and nonscientific impacts of its funded research grants, including social and workforce outcomes and economic growth. NIH officials expect that the Star Metrics program could provide more information about these other impacts. Officials told us that Star Metrics is currently developing an approach to capture this information, and that they expect to pilot the approach in 2012. However, at this time there is no expected completion date for reporting this information. In their responses to our data collection instrument, many of our 50 selected principal investigators reported that they used the Recovery Act funding they received from fiscal years 2009 through 2010 to purchase supplies, equipment, and testing services used in research. Some of the principal investigators also reported that in the course of conducting some of their Recovery Act-funded research, they were able to provide scientific training to health care professionals. The selected principal investigators provided anecdotal information about the other impacts of the selected grants. Recipients of Recovery Act funding, such as grantee institutions, do not systematically track these other impacts; however, they are not required by the Recovery Act to do so. In previous work on the Recovery Act, GAO identified difficulties in assessing other impacts, particularly in instances when data on the other impacts are not readily available. (See app. III for more details of the other impacts of NIH Recovery Act funding as reported by selected principal investigators.) Purchasing Supplies and Equipment. In their responses to our data collection instrument, two-thirds of our 50 selected principal investigators reported that they used the Recovery Act funding they received from NIH to purchase or lease laboratory equipment and supplies needed to conduct research. These transactions, which we corroborated by conducting a selected review of NIH Annual Progress Reports and Recovery Act recipient reports, could translate into additional sales and revenues for the vendors. According to the principal investigators, their transactions included biomedical equipment and supplies, office supplies, computer equipment, and software licenses. For example, one principal investigator reported purchasing highly specialized imaging equipment for $27,000, as well as other medical, laboratory, and office supplies. Purchasing Specialized Services. Over a quarter of our 50 selected principal investigators reported that they used NIH's Recovery Act funding to purchase certain laboratory testing services--such as genetic sequencing--from other research facilities that were better equipped to perform the testing and analyses. For example, one principal investigator reported contracting with a small local research company to perform specialized DNA analysis needed to determine the causes of immune deficiency disorders. In addition, a couple of principal investigators reported that they used NIH's Recovery Act funding to contract for consultations services, such as statistical analyses and the design of models needed for their research. Some principal investigators also purchased ancillary services that they said were needed to support clinical trials, such as services providing patient transportation, recruitment, and care. Scientific Training for Health Care Professionals. Nine of our 50 selected principal investigators also reported in our data collection instrument that in the course of conducting their Recovery Act-funded research they were able to provide scientific training to health care professionals. Some of these principal investigators cited the importance of exposing current and future physicians to research-based approaches for diagnosing and treating patients. For example, one principal investigator reported that while researching how to select treatments for cancer patients, new oncology researchers--fellows and junior faculty--were trained about the effects of human genetics on care delivery for cancer patients. According to this principal investigator, understanding the effects of genetics on cancer allows physicians to personalize the treatment options they offer to patients. The principal investigator also noted that the next generation of physicians needs to be knowledgeable about genomic approaches to cancer care, while developing the foundation for their research careers. According to another principal investigator, as part of research to determine why certain genes contribute to Alzheimer's disease, health care professionals were trained to analyze complex genetic datasets and to develop software packages needed to efficiently perform the analysis. In responses to our data collection instrument, a majority of our 50 selected principal investigators who direct research at the grantee institutions reported on the preliminary results from their research projects supported with Recovery Act funds. According to the majority of our selected principal investigators these preliminary results could contribute to future scientific developments in preventive medicine, the early detection of diseases, and medical therapies. Additionally, one principal investigator reported that some of the results of their research could lead to the development of research capabilities to be used by other researchers. A few principal investigators, however, stated that it was premature to report any preliminary results from their NIH Recovery Act- funded research, because they were still conducting clinical trials and analyzing data. In general, scientific research--including NIH-funded projects--can be lengthy and complex, and take years to obtain results. Grantee institutions and principal investigators in our review and NIH officials we interviewed reported that they track the scientific impact of NIH research--including preliminary results from research funded through the Recovery Act--primarily through peer-reviewed publications. NIH officials also reported that they track certain priority research areas and communicate potential scientific impacts through its Investment Reports. According to NIH, when a sufficiently large body of research results have accumulated the agency plans to prepare reports (similar to its Investment Reports) that highlight the impact of its Recovery Act- funded research. Other metrics used to track scientific impacts--including for Recovery Act-funded research--as reported by principal investigators in our review include the filing and approval of patent applications, the ability to secure future grant funding, presentations at professional meetings, utilization of products produced from their research, and changes to health care policies and clinical practices implemented as a result of their research. As noted earlier, the majority of our selected principal investigators provided preliminary results from their research projects supported with Recovery Act funds. The following are examples of these preliminary results: Prevention of Diseases. One principal investigator reported that their Recovery Act-supported research on coronary heart disease indicated that high levels of calcified and noncalcified plaque, which can clog arteries and contribute to heart disease, is present in young healthy people who have a family history of premature coronary disease. According to this principal investigator, the results of this research could be used to identify persons who would benefit from heart imaging tests and preventative therapy for coronary heart disease. Early Detection of Diseases. One principal investigator reported that their Recovery Act-supported research resulted in the identification of several hundred proteins that are associated with chronic pancreatitis. According to this principal investigator, this research could contribute towards creating new blood tests for detecting chronic pancreatitis. Another principal investigator reported identifying the symptoms that are the most important and efficient for making a diagnosis of autism in young children. Improvements in Medical Therapies. One principal investigator reported that data collected for their Recovery Act grant has yielded results in developing personalized therapeutic approaches for patients with idiopathic pulmonary fibrosis, a fatal disorder. This principal investigator noted that these results could help to simplify decision making regarding therapeutic interventions, such as for patients undergoing an organ transplant. Another principal investigator cited progress toward overcoming the resistance of colon cancer to existing treatment therapies, and another assessed two alternative therapies for coronary heart disease. A principal investigator also reported that their Recovery Act-supported research contributed to the development of a kidney dialysis monitoring device that could be less invasive and more cost-effective than the current surgically implanted monitoring systems. Improved Research Capabilities. One principal investigator reported that their Recovery Act-supported research contributed to the development of a new approach that is being utilized by other researchers studying the connections between different genes and traits, such as those that may lead to heart disease. A draft of this report was provided to HHS for review and comment. HHS provided technical comments that were incorporated as appropriate. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to other interested congressional committees, the Secretary of Health and Human Services, and the Director of the National Institutes of Health. This report will also be available on the GAO Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact Linda T. Kohn 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. Key contributors to this report are listed in appendix IV. To obtain the information National Institutes of Health (NIH) and selected NIH Recovery Act grantees have on the jobs supported with NIH Recovery Act funding, we interviewed NIH officials about the information they have on the full-time-equivalents (FTE) supported by the Recovery Act, and reviewed (1) NIH data containing information reported by grantee institutions to a nationwide data collection system at www.federalreporting.gov on the FTEs supported by NIH Recovery Act funding, (2) annual progress reports for fiscal year 2010 that NIH Recovery Act grantees are required to submit to NIH, and (3) other jobs information that NIH gathers from other sources. To assess the reliability of the data provided by NIH, we obtained information from agency officials knowledgeable about (1) NIH grant award data, (2) NIH Recovery Act grantee recipient reports, and (3) the jobs information that NIH gathers from other sources. We also performed data quality checks to assess the reliability of the Recovery Act grants data file received from NIH. These data quality checks involved an assessment to identify incorrect and erroneous entries or outliers. Based on the information we obtained and analyses we conducted, we determined that the data were sufficiently reliable for the purposes of this report. In addition, we selected five grantee institutions, which were universities that employ principal investigators who received NIH Recovery Act funding. The five selected grantee institutions met the following criteria: (1) received the largest portion of Recovery Act funds from NIH, (2) received the largest number of grants, and (3) reported the highest number of FTEs supported by NIH Recovery Act funds. The selected institutions were Johns Hopkins University, University of Michigan, University of Washington, University of Pennsylvania, and Duke University. The selected grantee institutions are not representative of all institutions that received Recovery Act funding. (See table 1 for more information about the five selected grantee institutions.) To gather more specific information about individual grants, we created a Web-based data collection instrument (DCI) and disseminated it to 50 selected principal investigators--10 principal investigators at each of the same five grantee institutions. The Web-based DCI contained questions about the types and number of jobs supported by the Recovery Act funding received from NIH. The selected principal investigators received grant awards that met the following criteria: (1) the grant was a new grant award and not a supplement to an existing grant, (2) the grant award was for $500,000 or greater (see table 2 for more details), and (3) the grant award was made on or before December 1, 2009. We reviewed the abstracts for all the grants that met the above criteria and made a judgmental selection of the final 50 grants--making sure to include a variety of grant types such as Challenge grants and Grand Opportunity (GO) grants that were developed for the Recovery Act. The 50 selected grant awards ranged in size from $500,000 to about $11,000,000. The principal investigators for these selected grants are not representative of all principal investigators who received NIH Recovery Act funding. To gather information about the grants from an institutional perspective, we also created a second Web-based DCI and disseminated it to an official involved in coordinating Recovery Act reporting at each of the five selected grantee institutions. We performed follow-up information gathering from selected principal investigators and administrators at grantee institutions that completed the DCI to supplement the information provided in the DCI. We also obtained and reviewed information reported by grantee institutions to the nationwide data collection system at www.federalreporting.gov about the number of jobs supported by the Recovery Act. The information on the number of FTEs supported by NIH Recovery Act funding reported to the nationwide data collection system by recipients of Recovery Act funding has certain limitations. First, the Office of Management and Budget (OMB) guidance requires FTE numbers to be reported quarterly and FTEs should not be added across quarters to obtain a cumulative number of FTEs. In addition, the calculation of FTEs may reflect full-time and/or multiple part-time jobs, therefore FTEs cannot be used to determine the total number of individual jobs. Moreover, because of a change in OMB's reporting guidelines, FTE data for the first reporting quarter may not be comparable to the data reported for subsequent reporting quarters. The number of FTEs represents only the jobs directly supported by the Recovery Act but does not capture the jobs indirectly supported by the act or other impacts of the spending. To identify the information NIH and selected grantee institutions and principal investigators have on the other impacts of the NIH Recovery Act funding they received, we utilized the Web-based DCI disseminated to the same 50 principal investigators--10 principal investigators at each of the five selected grantee institutions--noted earlier, and interviewed NIH officials. We asked the grantee institution and principal investigators to identify other impacts such as scientific impacts, impacts in the local community, and impacts on the grantee institution and principal investigators. We also asked NIH and principal investigators to identify the metrics they use to measure and track these other impacts. We contacted the State Recovery Act representative in two of the states in which our selected universities are located (North Carolina and Pennsylvania) to identify information on the other impacts of NIH Recovery Act funding in their jurisdictions. Finally, we reviewed relevant NIH Recovery Act grant guidance as well as OMB's Recovery Act guidance to identify Recovery Act grantee requirements for reporting information on FTEs and on the impacts of the Recovery Act grants to NIH and the nationwide data collection system at www.federalreporting.gov. We disseminated a Web-based data collection instrument (DCI) to a total of 50 selected principal investigators (10 principal investigators at each of five selected grantee institutions). The data collection instrument included questions about the jobs supported by NIH Recovery Act funding. Detailed results from selected questions in our data collection instrument related to the jobs supported by Recovery Act funding cited in this report are listed below in tables 3-6. For example, information about (1) the number of supported positions that existed before the Recovery Act and (2) the average number of hours worked by each supported job category. Not all totals add to 100 percent because respondents were given multiple answers and asked to check all that apply. We disseminated a Web-based data collection instrument to a total of 50 selected principal investigators (10 principal investigators at each of five selected grantee institutions). The data collection instrument included questions about the other impacts of NIH Recovery Act funding. Detailed results from selected questions in our data collection instrument related to the other impacts of Recovery Act funding cited in this report are listed in tables 7-10. For example, information about (1) the types of nonscientific impacts reported by selected principal investigators, and (2) the metrics used to track and measure scientific impacts. In addition to the contact named above, Will Simerl, Assistant Director; N. Rotimi Adebonojo; Leonard Brown; Carolyn Garvey; Krister Friday; Daniel S. Ries; and Monica Perez-Nelson made key contributions to this report.
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The American Recovery and Reinvestment Act of 2009 (Recovery Act) included $8.2 billion in funding for the National Institutes of Health (NIH) to be used to support additional scientific research-including extramural grants at universities and other research institutions. In 2009, the Acting Director of NIH testified that each extramural grant awarded with Recovery Act funding had the potential of supporting employment--full- or part-time scientific jobs--in addition to other impacts, such as contributing to advances in improving public health. GAO was asked to examine the use of Recovery Act funds by NIH grantees. Specifically, GAO addresses the information available from NIH and its grantees about the extent to which NIH Recovery Act funding (1) supported jobs, and (2) had other impacts. To obtain information on job impacts, GAO reviewed a database containing information NIH Recovery Act grantees reported to the national data collection system and interviewed NIH officials. To obtain more specific jobs information about individual grants, GAO administered a Web-based data collection instrument to 50 selected principal investigators who direct research at grantee institutions--10 principal investigators at each of five selected grantee institutions. The selected principal investigators had generally received awards of $500,000 or more. To obtain information on other Recovery Act impacts, GAO used information from the data collection instrument and interviewed NIH officials. Data reported by all of NIH's Recovery Act grantee institutions to the national data collection system at www.federalreporting.gov and available to NIH indicate that the number of full-time equivalent (FTEs) jobs supported by NIH Recovery Act funds increased from December 2009 through September 2010, and then remained steady from December 2010 through June 2011--the most recent quarter for which data are available. The number of FTEs supported by NIH Recovery Act funds increased from about 12,000 in the reporting quarter ending December 2009 to about 21,000 in the quarter ending in June 2011. The 50 selected principal investigators who direct research at the grantee institutions in GAO's review provided additional information explaining how the Recovery Act funding supported FTEs. Nearly one-third of the selected principal investigators reported that the NIH Recovery Act funding they received supported new positions, and about half of the principal investigators reported that the funding they received allowed them to avoid reductions in jobs or avoid a reduction in the number of hours worked by current employees. The selected principal investigators also reported that the Recovery Act funding they received primarily supported scientists and other faculty. NIH officials we interviewed reported that they receive some information from principal investigators about the other impacts of NIH-funded research, such as preliminary research results included in annual progress reports. NIH is also participating in the Star Metrics program--a multiagency venture to monitor the scientific, social, and economic impacts of federally funded science--which NIH officials expect could provide more information about these impacts. While Star Metrics is currently developing an approach to capture information about the other impacts of NIH grant funding, there is no expected completion date for reporting this information. In response to GAO's data collection instrument, selected principal investigators who direct research at the grantee institutions in GAO's review reported that the use of Recovery Act funds resulted in purchases of research supplies, equipment, laboratory testing services, and scientific training of health care professionals. The majority of the 50 selected principal investigators in GAO's review also reported preliminary results from their Recovery Act-funded research that could contribute to future scientific developments in prevention and early detection of disease, improvements in medical therapies, and improved research capabilities. The principal investigators in GAO's review and NIH officials GAO interviewed reported that they track the scientific impact of NIH research--including the impact of research funded through the Recovery Act--primarily through peer-reviewed publications, but also through other metrics such as the filing and approval of patent applications. According to NIH officials, when a sufficiently large body of research results has accumulated, NIH plans to prepare reports--similar to its existing publicly available Investment Reports--that will highlight the impact of its Recovery Act-funded research. The Department of Health and Human Services provided technical comments on a draft of this report, which GAO incorporated as appropriate.
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Natural gas is a vital energy source used in a large variety of applications, providing about one-fourth of the energy consumed in the United States. Natural gas is a colorless, odorless fossil fuel found underground that is composed mainly of methane and generated through the slow decomposition of ancient organic matter. Most natural gas consumed in this country is produced in North America, but an increasing portion is shipped from overseas in the form of liquefied natural gas (LNG). Natural gas is used in about 60 million homes and 5 million businesses in a variety of ways, such as for heating, fueling industrial processes in manufacturing operations, fueling electricity generation, and fueling some cars and buses. Most natural gas consumers are residential users, but they use only about 24 percent of the gas consumed in the United States. Other natural gas consumers include industrial consumers, electricity generators, and transportation users. The natural gas industry performs three separate functions to deliver natural gas to consumers: (1) production of the natural gas commodity, (2) transportation of the commodity between states, and (3) local distribution within states. These major functions are illustrated in figure 1. To produce the natural gas commodity, producers drill wells to reach pockets of natural gas, either at sea (such as in the Gulf of Mexico) or on land (such as in the Powder River Basin of the Rocky Mountain states). Once the gas well has been drilled, the drilling rig is removed and the natural gas flows to the surface, where it is combined with gas from other nearby wells and moved locally through a network of progressively larger local pipelines to processing plants. There, the raw gas is processed to remove water vapor, hydrogen sulfide, and other compounds so that it can be transported, bought, and sold nationally. Producers may choose to sell the natural gas commodity to a variety of customers, including marketers, traders, and a variety of consumers. Furthermore, the various players in the market may, in turn, sell gas back and forth several times before it is actually delivered. Eventually, the natural gas is transported via a network of larger interstate pipelines that connect various supply regions, such as the Gulf of Mexico, to areas where natural gas is consumed, such as large cities on the East Coast. Interstate pipelines converge at several pipeline network interconnections, which link gas consumers across the United States to several different production regions. As a result of this interconnected network, prices of natural gas at different trading locations vary somewhat, but they generally move together as the overall supply and demand balance changes. Some interstate pipeline intersections have become important locations for trading natural gas, such as the "Henry Hub" pipeline interconnection in Louisiana. Most consumers, particularly residential and small commercial consumers, receive natural gas from local natural gas utilities. Utilities generally operate as monopolies within service areas defined by states and, as such, are the only entity delivering natural gas to most consumers. In most cases, local gas utilities also purchase the natural gas commodity for their customers. Local gas utilities receive natural gas from interstate pipelines and route it into local delivery pipelines to homes and businesses, where it is consumed. A smaller number of consumers--such as operators of electric power plants or operators of industrial or manufacturing plants--may completely bypass the local gas utility. Because these consumers use large amounts of natural gas, they may purchase gas directly from suppliers and receive natural gas directly from interstate pipelines. The federal government has authority to regulate certain sales of natural gas and its interstate transportation and does so through two agencies. FERC has primary responsibility for natural gas oversight. FERC is led by five commissioners appointed by the President and approved by the Senate. The Commodities Futures Trading Commission (CFTC) also plays a role in federal oversight related to natural gas prices. It is responsible for ensuring that fraud, manipulation, and abusive practices do not occur in federally regulated financial markets, where some natural gas transactions are conducted. States directly regulate the local gas utilities that fall under their jurisdiction. Because only one utility generally provides gas to a specific service area, utilities lack competition and could take advantage of their monopoly by artificially raising natural gas prices for consumers or by taking other actions. To regulate investor-owned utilities, which distribute over 90 percent of the gas delivered by utilities, states created agencies called public utility commissions. States generally do not allow utilities to profit from the natural gas that they resell, although they allow utilities to recover the costs of purchasing the natural gas commodity by passing those costs on to customers. Traditionally, utilities sold natural gas at a single price per unit of gas--such as per thousand cubic feet--approved by a commission. However, as consumer prices have become more variable, states have generally started to allow utilities to use a "gas cost adjustment" system, where utilities independently adjust the rates they charge consumers, as long as utilities are not profiting from the gas sales. Since natural gas commodity prices were deregulated in 1993, FERC's role ensuring that the price consumers pay for natural gas is fair has been twofold and limited. First, FERC has an indirect role overseeing the market that determines commodity prices, with activities generally limited to monitoring the market to identify and punish market manipulation while supporting the development of competition. Recently, this oversight role has become more important because the commodity portion of the price that consumers pay for natural gas has increased from about 30 percent in 1993 to almost 60 percent in 2005. FERC faces challenges in carrying out its oversight of the commodity markets, including difficulties ensuring that markets are competitive and completely free from manipulation. Second, FERC directly approves rates that determine interstate transportation prices. While FERC retains a direct role in approving the rates for interstate transportation, this role has decreased in importance because the interstate transportation portion of the price that consumers pay has decreased from about 20 percent in 1993 to about 10 percent in 2005. In carrying out its responsibilities to help ensure that natural gas commodity prices in deregulated markets are competitive and free from manipulation, FERC's Office of Enforcement polices wholesale natural gas commodity markets for manipulation. Relying on a wide range of energy data sources in FERC's Market Monitoring Center, energy market analysts in the Office of Enforcement monitor prices and volumes of natural gas commodity transactions at many key energy market trading centers nationwide to identify price anomalies or other unusual market activity that might indicate market manipulation. FERC officials explained that because natural gas prices at different locations generally move together, FERC's monitoring of prices at key energy market trading centers allows them to understand the overall natural gas market. In addition, they monitor other factors that may affect the market, such as storage levels, imports and exports, weather, supply and demand for other fuels, and electricity transmission constraints and outages. The Office of Enforcement also operates an enforcement hotline, through which anyone can anonymously offer information about suspicious market activities, such as bidding anomalies or improper transactions between a company and an affiliate. When Office of Enforcement staff identify unexpected or unexplained deviations in price behavior or other anomalies, they examine the anomaly and undertake informal or formal investigations when needed. In response to unusual circumstances resulting in short-term market changes, the office has increased its monitoring and enforcement efforts. For example, in response to persistent high energy prices and Hurricane Katrina, which substantially disrupted domestic natural gas supplies during the fall and winter of 2005, the office initiated a daily review of market activity and intensified its investigation of unusual trading activity, according to office officials. In addition, the staff conduct a variety of random and targeted audits of individual companies to determine whether companies are following rules and regulations regarding trading activities. For example, in 2004, FERC completed 27 financial audits to determine compliance with its accounting regulations and an additional 12 audits to determine compliance with FERC standards of conduct and other requirements. Among other things, these audits resulted in over 100 recommendations to remedy deficiencies and uncovered $10 million in pipeline costs that were improperly capitalized. To further help ensure that natural gas commodity prices are competitive and free from manipulation, FERC also supports the development of competitive markets. It has done this primarily by promulgating rules that prevent pipeline companies from giving undue preference to their energy affiliates by requiring that pipeline companies completely separate (or "unbundle") their transportation, storage, and sales services and open access of their pipeline to other entities. Recently, it has supported the development of competitive markets by fine-tuning existing policies rather than making major changes: In 2003, for example, FERC Order Number 2004 updated rules of conduct designed to prevent natural gas pipelines and public utilities from giving undue preference to their affiliates. Also in 2003, FERC developed standards and issued orders designed to improve the information about natural gas markets published in price indices--a key source of market information that market participants use to make informed decisions about buying and selling natural gas. While FERC's role overseeing natural gas commodity markets has been limited, it has become more important in recent years because the commodity portion of prices that consumers pay for natural gas has increased more than the other components. As shown in figure 2, real natural gas commodity prices accounted for almost 60 percent of the total consumer price in 2005, compared with about 30 percent in 1993. Specifically, real natural gas commodity prices increased from $2.59 in 1993 to $7.51 in 2005--an increase of about 190 percent. Over the same period, real interstate transportation prices and other charges decreased from $1.48 to $1.13 and local distribution charges increased slightly from $3.75 to $4.17. FERC continues to face challenges ensuring that the gas commodity market is competitive and free from manipulation. EPAct 2005 allows FERC to gain access to information about virtually any natural gas transaction. However, senior Office of Enforcement officials told us that while they have increased the number and types of data sources they actively monitor, they do not actively monitor all natural gas trades that occur through established markets. The officials said that, even after increasing the number of staff working in the Office of Enforcement dedicated to market monitoring, they are still not able to examine all of the potentially millions of transactions that occur in numerous physical and financial markets. Since the passage of EPAct 2005, FERC also has authority to police all markets that could affect natural gas for manipulation, including sales that do not involve pipeline companies or their affiliates. However, FERC officials have acknowledged that it is often difficult to determine whether markets are competitive and completely free from manipulation because, for example, it is difficult to determine what prices should be under completely competitive conditions. In addition to its efforts regarding competitive natural gas commodity markets, FERC continues to approve the prices that pipeline companies charge for the interstate transportation of natural gas. The Natural Gas Act of 1938, as amended, mandates that FERC regulate the rates that natural gas pipeline companies under its jurisdiction can charge for interstate transportation of natural gas to ensure that rates are just and reasonable. Specifically, FERC requires that every natural gas company file schedules with FERC showing all rates, contracts, and charges for interstate transportation of natural gas subject to FERC. FERC staff analyze the information provided by these companies to ensure that proposed rates are just and reasonable. However, in practice, FERC officials told us that typically, the proposed rate for each unit of service is calculated by dividing a pipeline's overall cost of service--that is, the company's total revenue required to cover the pipeline's operations plus a just and reasonable return on its investment in facilities--by the projected amount of gas its customers will use. A just and reasonable return is typically determined by evaluating the range of returns generally experienced in the industry, and adjusted to reflect the specific investment risks of the pipeline company as compared with the industry. Ultimately, the return on investment must be sufficient to attract capital and compensate the pipeline's investors for the risks of their investment, but not higher. FERC's role in regulating the rates charged for the interstate transportation component of the price that consumers pay for natural gas has become less prominent in recent years because the rates that pipeline companies charge for transportation of natural gas along interstate pipelines have declined relative to the other components of the price consumers pay. As a result, the interstate transportation portion of the consumer price for natural gas accounted for less than 10 percent in 2005, compared with about 20 percent in 1993, as shown in figure 2. FERC has made substantial progress implementing the additional authorities related to natural gas provided to it in EPAct 2005 but has not yet used its new authority to impose fines or penalties authorized by the act. EPAct 2005 identified six actions for FERC related to natural gas or natural gas markets. As of June 2006, FERC has met all deadlines thus far for implementing additional EPAct 2005 requirements, completing or initiating work on five of the six actions identified in EPAct 2005. FERC has not yet imposed any penalties for violations of rules and regulations related to its new penalty authority since the enactment of EPAct 2005, according to Office of Enforcement officials, because investigations of violations that have occurred since the passage of EPAct 2005 are still under way. Office of Enforcement officials told us that some investigations will be completed soon, and FERC will use its authority if the investigations warrant. Table 1 shows the status of the additional authorities related to natural gas provided by EPAct 2005. In addition, the Office of Enforcement has begun to use the authority under EPAct 2005 to expand its monitoring and investigation of those who violate its new antimanipulation rules. Following the enactment of EPAct 2005, FERC issued antimanipulation regulations implementing its new authority to monitor, investigate, and impose fines and penalties on any person under its jurisdiction that manipulated natural gas commodity prices (action No. 3 in table 1). Previously, FERC could only penalize behavior that manipulated natural gas commodity prices for a limited number of transactions, such as those by owners of interstate pipeline companies and other entities transporting natural gas on an interstate pipeline. Under the new regulations that implement EPAct 2005, FERC's prohibition against market manipulation applies to transactions by producers, financial companies, local utilities, and natural gas traders, most of which were not previously regulated by FERC. According to Office of Enforcement officials, to implement the authority, the Office of Enforcement has dedicated more time and staff efforts analyzing transactions and other market behavior in venues previously outside FERC's jurisdiction. For example, Office of Enforcement officials told us they are now able to examine whether financial market transactions, which are not generally under FERC jurisdiction, affect the physical natural gas markets over which FERC has authority. However, FERC has not yet imposed any penalties for violations of rules and regulations related to its new penalty authority since the enactment of EPAct 2005, according to Office of Enforcement officials. With regard to antimanipulation rules, according to Office of Enforcement staff, proving market manipulation is harder than it was before EPAct 2005. Instead of proving that the market behavior had a "foreseeable" effect on market prices, conditions, and rules, FERC must now prove that the conduct that resulted in manipulated prices is intentional or reckless, which office staff told us is a more difficult standard. Although the Office of Enforcement has begun investigating possible violations that have occurred since passage of EPAct 2005--and that may be subject to the new penalty authority--the investigations are still under way. As a result, no penalties have been levied under the new authority, but FERC staff told us they will use its authority if warranted. Nevertheless, according to Office of Enforcement officials, their efforts to implement the new authorities granted by EPAct 2005 are already having tangible results outside of FERC's antimanipulation activities. Specifically, Office of Enforcement officials noted that following the issuance of FERC's Policy Statement on Enforcement in October 2005, which explained the new market manipulation rules and higher penalties, some industry members have self reported instances of noncompliance with FERC-approved rules in an effort to gain FERC's consideration for a lesser penalty. States directly oversee the prices utilities charge for local distribution of natural gas but have only a limited role approving natural gas commodity and interstate transportation prices. States review and approve the local delivery prices that utilities charge, and they review and approve the charges utilities pass on to consumers to recover the cost of purchasing and transporting the natural gas commodity. However, states generally allow utilities to pass on commodity prices to local consumers, according to state officials we interviewed. States rely on FERC to oversee commodity and interstate transportation prices, and stakeholders told us they lacked knowledge about FERC's oversight of natural gas commodity prices. Some stakeholders said they had little confidence that natural gas commodity markets were free from manipulation. FERC officials acknowledged that providing some additional information would increase stakeholders' understanding of FERC's oversight of natural gas and help deter market manipulation. States directly oversee utilities' charges for local distribution of natural gas. In most states, utilities file proposals to set or change natural gas distribution charges with state public utility commissions--state regulators--that specify the rates utilities may charge consumers. These rate proposals outline the utilities' costs to distribute natural gas. In general, states allow utilities to earn a regulated rate of return, or profit, and the profits allow utilities to realize a return on their investment and enable the utilities to make improvements. Utilities file rate proposals at different intervals. Some follow a regular schedule, such as filing monthly or annually, while others file only when they believe a price change is needed. State regulators review these proposals and may either accept them--enabling the utility to charge those prices to consumers--or deny them, requiring the utility to charge a different rate. Although state regulators directly approve local distribution charges, the regulators cannot substantially lower utilities' local distribution charges without affecting service quality or long-term financial health, according to state officials. Like any business, utilities must cover their cost of service, which can include charges for the cost of expanding or maintaining the gas pipelines, the cost of storage paid by the utility, or the cost of utility employees to read consumers' meters or provide other services. Unless utilities cover these costs, they may eventually face financial problems or go out of business. Since deregulation, local distribution charges have risen slightly in real terms, but they have decreased significantly as a share of the total consumer price. Local distribution prices increased from $3.75 in 1993 to $4.17 in 2005 (in constant 2005 dollars), but the share of the price consumers paid for utilities to distribute natural gas decreased, dropping from about 50 percent of the total price in 1993 to about 30 percent in 2005. As a result, state regulators' ability to affect total natural gas prices paid by consumers has decreased. This occurred primarily because of the increase in natural gas commodity prices, which almost tripled in price over the same period. States exercise limited oversight of the gas commodity and transportation components of consumer prices by reviewing the costs utilities pass on to their consumers. States can deny utilities from recovering the costs of these purchases from consumers if the costs of the gas purchases do not reflect fair market prices; however, regulators in states we reviewed told us this rarely occurs. Officials in only 4 of the 10 states we reviewed said they had denied utilities' recovery of gas purchases since 2002. Of these 4 states, the state officials recalled that they had done so infrequently-- generally in only one or two cases, out of the dozens of rate changes utilities have proposed since 2002. State regulators cited several reasons why states rarely denied utilities from recovering their costs--for example, they told us it is difficult to prove these costs were above a fair market price. Also, some state regulators we talked to expressed a desire to avoid being overly directive regarding utilities' purchases because the regulators said that utilities have greater expertise in making purchasing decisions. Because state regulators have limited oversight of consumer prices but are concerned about recent high and volatile prices, they generally provide for two types of actions to help stabilize consumer prices--they influence how utilities purchase the commodity, and they sometimes implement "customer choice" programs. First, most states encourage utilities to engage in "hedging," which reduces the need for utilities to buy from volatile short-term spot markets. Hedging includes such techniques as buying gas at fixed prices in long-term contracts or storing gas purchased when prices are relatively low, to be used during times when prices are high. Utilities in these states often engage in some form of hedging to insulate consumers from "rate shocks," where prices greatly increase from one month to another. While hedging does not guarantee the lowest price, it tends to smooth prices, giving consumers greater price stability. Second, some states offer "customer choice" programs that allow residential consumers to choose to purchase gas from natural gas suppliers other than the utility provider. Customer choice programs may encourage more stable natural gas prices because nonutility suppliers have an incentive to hedge their gas purchases to minimize the risk of high prices--unlike utilities, which fully recover their gas purchase costs from the consumer. Therefore, nonutility suppliers may be more likely to offer gas service to consumers at a set price for a period of months or years. However, regulators in the states we reviewed told us that customer choice did not necessarily lead to lower prices, because nonutility gas marketers still purchase gas from the same natural gas commodity markets from which utilities purchase. Moreover, high and variable natural gas commodity prices have decreased participation in customer choice programs. According to the Energy Information Administration, participation in customer choice programs declined from 4.1 million households in 2002 to about 3.9 million households in 2005--representing about 6 percent of all gas users in the United States--and mostly concentrated in two states, Georgia and Ohio. States rely on FERC to oversee the market and investigate market manipulation. U.S. Supreme Court decisions and other legal interpretations have established that the federal government has exclusive responsibility for overseeing natural gas commodity prices. As a result, according to the state regulators and other experts we interviewed, the states must rely on FERC to monitor commodity markets and ensure prices are fair. FERC officials acknowledge that it is important to inform stakeholders about their oversight activities. In that regard, in recent performance reports FERC listed actions it has taken to provide information on its oversight, such as providing copies of its market surveillance reports to state public utility commissions. Officials in the Office of Enforcement told us they discuss their market-monitoring and oversight activities during twice-yearly meetings with the National Association of Regulatory Utility Commissioners (NARUC), a national organization of state regulators. In addition, upon request, Office of Enforcement officials have met with state regulators to discuss their market oversight activities. FERC compiles data on the numbers and subject areas of the informal and formal investigations it undertakes, and it reports some of those data for completed investigations. For example, FERC publicly reports the number of hotline calls it receives and some statistics on closed investigations and audits through documents available on its Web site, such as press releases, FERC staff reports, the agency's annual report to Congress, and its State of the Markets Report, which summarizes information about energy market conditions and identifying emerging trends. However, FERC staff are prohibited from disclosing details about ongoing investigations except by order from the FERC commissioners. In that regard, FERC's practice has been to release information about the numbers and subject areas of ongoing investigations only rarely because it has been its view that providing overly detailed information could risk undermining FERC's market-monitoring efforts. FERC officials recognize that publicly disclosing some additional information about its oversight activities, as long as it would not compromise ongoing investigations, could serve to increase stakeholder understanding and, potentially, deter market manipulation. In this regard, FERC has occasionally disclosed information about ongoing oversight efforts at the commissioner's discretion, as it did in 2002 during the Enron investigation in an effort to increase public understanding of FERC's oversight activities and raise public confidence in energy markets. FERC officials also told us that they are developing a Web page to better inform the public about its oversight activities in response to questions they received from the public. Despite FERC's past efforts, some stakeholders still do not have a full understanding of FERC's oversight activities and lack confidence in the fairness of natural gas commodity prices. Some state regulators we interviewed told us they lacked assurance that natural gas prices are free from manipulation. For example, regulators from one state sent a letter to FERC expressing concern about high gas prices and that FERC's oversight may not prevent market manipulation. In response, Office of Enforcement officials invited the state regulators to their offices in Washington, D.C., for discussions and to tour FERC's Market Monitoring Center to observe firsthand how FERC monitors the market. Between October 2005 and February 2006, FERC received similar letters from two other states and one municipal government requesting information about rising natural gas prices and possible market manipulation. Other state regulators we interviewed told us they would benefit from greater coordination with FERC regarding natural gas prices. Moreover, according to one state commissioner on the NARUC gas committee, state commissioners vary in their knowledge of what FERC staff do to monitor natural gas commodity markets--and many members have limited knowledge. In addition, a NARUC gas committee official elaborated that FERC outreach to the states would help both FERC and the states better fulfill their respective regulatory duties. Citing their concern over rising natural gas prices and concerns over monitoring of commodity markets, attorneys general from four Midwestern states commissioned a report to investigate whether natural gas prices were artificially high as a result of market manipulation. Oversight of natural gas markets has evolved substantially from the days when the federal government set prices based on costs for natural gas produced at wells and controlled, together with the states, nearly all of the rest of the costs of delivering it to consumers. However, aside from FERC's efforts to prevent market manipulation, neither the federal government nor the states have much influence on the natural gas commodity price that now accounts for the largest portion of the price that consumers pay. As a result, the natural gas prices consumers pay will remain highly affected by what happens in the commodity markets. Nevertheless, federal oversight of the commodity markets remains a work in progress. Stakeholders, including state regulators, other government officials, and the public, are highly affected by the commodity markets that FERC is charged with overseeing, but some of these stakeholders remain largely unaware of FERC's oversight processes and activities. Because of regulatory limitations, FERC staff do not publicly disclose information about informal and formal investigations unless the investigations have been completed and have resulted in a formal penalty, despite the advantages such information could have in increasing stakeholder understanding of FERC's oversight activities and, potentially, deterring market manipulation. However, under current regulations, FERC commissioners have it within their authority to disclose this information. Furthermore, because the commodity component of the price that consumers ultimately pay for their natural gas has taken on such prominence and because states rely on FERC to oversee the commodity market, it is increasingly important for stakeholders to understand what FERC is doing to police this market. In this regard, FERC recognizes the need to provide more information to stakeholders about its oversight efforts and has multiple ways to do so, such as through its Web site. In providing even more information to stakeholders on its oversight efforts, including information, as appropriate, about ongoing monitoring and investigation activities, FERC could both increase stakeholders' understanding about FERC's efforts to ensure the fairness of natural gas prices and better deter market manipulation. Given the potential benefits of providing more information on its oversight activities, we recommend that the Chairman of FERC provide more information to stakeholders, including state regulators, other government officials, and the public, about actions taken by FERC to ensure that natural gas prices are fair. This effort should be undertaken within existing law and regulation, build upon the efforts that FERC already has under way, and use the information FERC already compiles on its monitoring and investigations. We agree that disclosure of information that is specific or detailed could provide would-be market manipulators with information about FERC's sources and methods of operation. Therefore, we believe it prudent that the Chairman have initial discretion on how best to do this. The information we recommend that the Chairman consider providing to stakeholders, including state regulators and, where possible, the public, includes the following: information on how the Office of Enforcement staff analyze natural gas markets and how the staff go about identifying market anomalies or unusual market behavior; information on the types of unusual market behavior that warrant further investigation by the Office of Enforcement; and, more timely information on the informal and formal investigations under way, such as the numbers and subject areas but not the identities of those under investigation. We provided the Federal Energy Regulatory Commission with a draft copy of this report for review and comment. FERC generally agreed with the report's findings, conclusions, and recommendation and offered minor technical comments, which we have incorporated, as appropriate. FERC's written comments are reproduced in appendix II. 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, will send copies to the Chairman of FERC and other interested parties. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. In addition to the contact named above, Karla Springer (Assistant Director), Lee Carroll, James Cooksey, John Forrester, Jon Ludwigson, Kristen Massey, Alison O'Neill, Frank Rusco, Barbara Timmerman, and John Wanska made key contributions to this report. Others who made important contributions include Casey Brown, Michael Derr, Glenn Fischer, and Kim Raheb.
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Following Hurricanes Katrina and Rita, natural gas prices spiked to more than $15 per thousand cubic feet, nearly seven times higher than in the late 1990s. As a result, policymakers have increasingly focused on better understanding how prices are overseen. The prices that consumers pay for natural gas are composed of (1) the commodity price, (2) the cost of interstate transportation, and (3) local distribution charges. Oversight of these components belongs to the federal government, through the Federal Energy Regulatory Commission (FERC), and the states. In 1993, federal price controls over commodity prices were removed, but FERC is still charged with ensuring that prices are fair. Recently, the Energy Policy Act of 2005 (EPAct 2005) broadened FERC's authority. GAO agreed to (1) analyze FERC's role overseeing natural gas prices, (2) summarize FERC's progress in implementing EPAct 2005, and (3) examine states' role in overseeing natural gas prices. In preparing this report, GAO met with officials from 10 states that regulate gas in different ways and analyzed relevant laws and documentation. Since natural gas commodity prices were deregulated in 1993, FERC's role in ensuring that commodity prices are determined competitively and are free from manipulation has been limited to (1) indirectly monitoring commodity markets to identify and punish market manipulation and (2) supporting competition in those markets. FERC faces challenges ensuring prices are fair, however, because staff cannot monitor all of the potentially millions of transactions and because it is difficult to identify market manipulation. FERC's oversight of commodity markets has risen in importance recently because the commodity price amounted to nearly 60 percent of the total consumer price in 2005 compared with about 30 percent in 1993. FERC also directly approves interstate transportation prices. FERC has completed action on four of the six new tasks identified by EPAct 2005 related to natural gas. FERC officials said that EPAct 2005 has achieved tangible results. For example, following FERC's issuance of a policy statement on enforcement in October 2005, some industry members have self-reported instances of noncompliance with FERC-approved rules in an effort to gain consideration for a lesser penalty. States directly oversee prices for local distribution of natural gas and have a limited role approving commodity and interstate transportation prices. States directly approve utilities' charges for local delivery of natural gas, but this represented only about 30 percent of the consumer price in 2005. While states can deny gas utilities from passing on the cost of the gas commodity to consumers, state officials told us this rarely occurs. State officials rely on FERC to ensure that commodity prices are fair, but some said they are unaware of FERC's oversight efforts. FERC officials agree that expanding the information they provide to stakeholders would improve stakeholders' understanding of FERC's efforts and could help deter manipulation.
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To manage major construction projects, DOE project directors in EM and NNSA are required to follow specific DOE directives, policies, and guidance for contract and project management. Among these is DOE Order 413.3B, which provides direction for planning and executing projects. To oversee projects and approve critical decisions, DOE conducts its own reviews, often with the help of independent technical experts. For example, for large projects (i.e., projects with a total cost of greater than $100 million), DOE's Office of Acquisition and Project Management is required to validate the accuracy and completeness of a project's performance baseline as part of each important project step. NNSA's largest ongoing construction project involves the disposition of surplus U.S. weapons-grade plutonium as part of the Plutonium Disposition Program. Under an agreement signed in 2000, the United States and Russia will each dispose of at least 34 metric tons of surplus weapons-grade plutonium by irradiating it as MOX fuel in nuclear reactors. A key part of the U.S. program includes the construction of two nuclear facilities at DOE's Savannah River Site: a MOX facility that will produce MOX fuel for nuclear reactors and a Waste Solidification Building to dispose of the liquid waste from the MOX facility. A third nuclear facility had been planned for the Savannah River Site to disassemble nuclear weapon pits (i.e., the spherical central core of a nuclear weapon that is compressed with high explosives to create a nuclear explosion)--the Pit Disassembly and Conversion Facility--and to provide plutonium feedstock for fuel fabrication. NNSA canceled the facility in January 2012 and, instead, decided to meet its feedstock requirements through existing facilities at DOE's Los Alamos National Laboratory and the Savannah River Site, including potentially the MOX facility. NNSA spent approximately $730 million on the design of this facility prior to its cancellation. A basic tenet of effective project management is the ability to complete projects on time and within budget. DOE has continued to experience management weaknesses in major projects (i.e., those costing $750 million or more). In response, since March 2009, DOE has undertaken a number of new reforms to improve its management of major projects, including those overseen by EM and NNSA. For example, DOE has updated program and project management policies and guidance in an effort to improve the reliability of project cost estimates, better assess project risks, and better ensure project reviews that are timely and useful and that identify problems early. Further, in November 2010, DOE took steps to enhance project management and oversight by requiring peer reviews and independent cost estimates for projects with values of more than $100 million. NNSA has also taken actions to improve the management of projects that it oversees. For example, in August 2012, the NNSA issued guidance calling for design work to be 90 percent complete before construction can begin to minimize design changes and associated cost increases and schedule delays. Our 2012 work examining DOE's management of nonmajor projects-- those costing less than $750 million--indicates that DOE's reform efforts have helped in managing the department's cost and schedule targets. In particular, in December 2012, we reported that EM and NNSA were making some progress in managing some of the 71 nonmajor projects that were completed or ongoing for fiscal years 2008 to 2012 and that had a total estimated cost of approximately $10.1 billion. For example, we identified some nonmajor projects that used sound project management practices, such as the application of effective acquisition strategies, to help ensure the successful completion of these projects. This was consistent with what we found in our October 2012 report on EM's cleanup projects funded by the American Recovery and Reinvestment Act of 2009. Of the completed projects we examined, 92 percent met the performance standard of completing project work scope without exceeding the cost target by more than 10 percent, according to EM data. In recognition of these improvements in the management of nonmajor projects, we narrowed the focus of the designation of EM and NNSA on our 2013 high-risk list to major contracts and projects at EM and NNSA. DOE's actions to improve project management are promising, but their impact on meeting cost and schedule targets is not yet clear. Because all ongoing major projects have been in construction for several years, neither EM nor NNSA has a major project that can demonstrate the impact of DOE's recent reforms. As we have reported in the past few years, ongoing major projects continue to experience significant cost increases and schedule delays as shown in the following examples: 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. Moreover, we found that DOE's incentives and management controls were inadequate for ensuring effective project management, and that DOE had in some instances prematurely rewarded the contractor for resolving technical issues and completing work. In March 2012, we reported that NNSA's project to design and construct the Chemistry and Metallurgy Research Replacement Nuclear Facility--a new plutonium facility at NNSA's Los Alamos National Laboratory--was expected to cost between $3.7 billion to $5.8 billion--nearly a six-fold increase from the initial estimate. In February 2012, NNSA deferred construction of the facility by at least an additional 5 years, bringing the total delay to between 8 and 12 years from NNSA's initial plan. A number of major problems contributed to this increase, including infrastructure-related design changes. GAO, 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). In November 2010, we reported that NNSA's plans to construct a modern Uranium Processing Facility at its Y-12 National Security Complex in Oak Ridge, Tennessee, had experienced significant cost increases. More recently, in September 2011, NNSA estimated that the facility would cost from $4.2 billion to $6.5 billion to construct--a nearly seven-fold cost increase from the original estimate. In addition, NNSA has delayed the expected completion date by 11 years, to 2023. In the November 2010 report, as well as in a January 2010 report, we found a number of major problems that contributed to this increase, including preparation of a cost estimate in 2007 that did not meet all cost estimating best practices. Also, 6 of 10 technologies to be used in the facility were not sufficiently mature, which could lead to cost and schedule delays if the technologies do not perform as intended. In regard to nonmajor projects, while we reported in December 2012 on progress by EM and NNSA in managing nonmajor projects, we also found that of the 71 nonmajor projects that EM and NNSA completed or had under way from fiscal years 2008 to 2012, 23 projects did not meet or were not expected to meet one or more of their three performance targets for scope, cost, and completion date. 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 we noted in our February 2013 high-risk report, while we have shifted our focus to major contracts and projects, we will continue to monitor the performance of these nonmajor projects. In these reports and others, we have made recommendations calling on DOE to ensure that project management requirements are consistently followed, to improve oversight of contractors, and to strengthen accountability, among others. DOE has generally agreed with these recommendations and has taken action to address many of them. We will continue to monitor DOE's project management and its implementation of their actions to resolve project management weaknesses. Our ongoing review of NNSA's Plutonium Disposition Program, including examining recent problems with the ongoing construction of the MOX facility--a major project--and the Waste Solidification Building--a nonmajor project--has resulted in some preliminary observations that highlight the need for continued efforts by DOE to improve contract and project management. DOE is currently forecasting an increase in the total project cost for the MOX facility from $4.9 billion to $7.7 billion and a delay in the start of operations from October 2016 to November 2019. Specifically, DOE is evaluating a project baseline change proposal prepared by NNSA's contractor for the MOX facility. The cost increase and schedule delay will not be known until DOE completes its review of the contractor's proposal and DOE's project oversight office completes an independent cost estimate. DOE currently plans to complete its review and approve a new project baseline by September 2013. With regard to the Waste Solidification Building, DOE approved in December 2012 a revised performance baseline to increase the cost from the initial estimate of $344.5 million to $414.1 million and a delay in the start of operations from September 2013 to August 2015. Our ongoing work is focused on several areas, including the following: Critical system components' design adequacy. According to NNSA officials and the contractor for the MOX facility, one of the primary reasons for the proposed cost increase and schedule delay is due to inadequately designed critical system components, such as the gloveboxes used in the facility for handling plutonium and the infrastructure needed to support these gloveboxes. According to these officials, although the design of the facility is based on a similar facility in France, the cost of adapting the French design to the design needs of this project was not well understood when the project was approved for construction. The performance baseline for the MOX facility was also 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 work, 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. Understanding the nuclear supplier base. According to NNSA officials and the contractor for the MOX facility, another primary reason for the proposed cost increase and schedule delay is not adequately understanding the ability of the nuclear industry to fabricate and deliver nuclear-quality components to meet the project schedule. Under the terms of the MOX facility contract, the contractor was required to submit, beginning at the completion of preliminary design, semiannual reports regarding the condition of the construction and equipment markets and identify factors, such as availability of labor, materials, and equipment that may affect the cost or schedule for completing the MOX facility. As part of our ongoing work, we plan to review these reports to understand the extent to which the contractor had assessed market conditions. Changes in project scope. Our ongoing review of the MOX facility includes examining NNSA's direction to its contractor to add to the scope of the construction contract to include capability that NNSA had planned for the cancelled Pit Disassembly and Conversion Facility. As part of our ongoing work, we will examine the extent to which this change in scope affects the cost and schedule of the project and the extent to which this change is consistent with a December 2012 memo from the Deputy Secretary of Energy that emphasizes the importance of improving upfront planning, including changes in scope, as well as defining contract requirements prior to issuing a solicitation. Effectiveness of project reviews. NNSA project reviews of the MOX facility and the Waste Solidification Building have identified challenges to meeting the facilities' performance baselines and made related recommendations. For example, 2011 and 2012 peer review reports of the MOX facility identified concerns regarding installation rates for equipment and recommended that realistic installation rates be included in the cost estimate. However, the NNSA contractor's 2012 baseline change proposal ultimately cited installation rates as one of the drivers of the proposed cost increase. As part of our ongoing work, we are continuing to gather information on what actions NNSA and its contractor took when the 2011 peer review first raised the concern and the extent to which any actions were taken in response to the review. We are also continuing to gather information on project reviews of the Waste Solidification Building, to determine how responsive program officials were to the findings and recommendations of these reviews. Life-cycle cost estimate for the Plutonium Disposition Program. In addition to setting the cost and schedule performance baselines of the MOX facility and Waste Solidification Building, NNSA has developed a life-cycle cost estimate for the overall effort of the Plutonium Disposition Program to dispose of at least 34 metric tons of surplus weapons-grade plutonium. NNSA officials told us that there has never been a review of this life-cycle estimate by an outside entity but that they are conducting an independent assessment of portions of the life-cycle cost estimate, including the operating cost of the MOX facility. As part of our ongoing work, we are reviewing NNSA's preliminary life-cycle cost estimate and the steps NNSA is taking to validate this cost estimate. We plan to report on this ongoing work later this year. Chairman Frelinghuysen, Ranking Member Kaptur, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff members have any questions about this testimony, please contact me at (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 testimony. GAO staff who made key contributions to this testimony are Dan Feehan and Kiki Theodoropoulos, Assistant Directors; and Joseph Cook, and Cristian Ion. 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 relies primarily on contractors to carry out its diverse missions and operate its laboratories and other facilities, with about 90 percent of its annual budget spent on contracts and capital asset projects. Since 1990, GAO has reported that DOE has suffered from substantial and continual weaknesses in effectively overseeing contractors and managing large, expensive, and technically complex projects. As of February 2013, EM and NNSA remained on GAO's list of areas at high risk of fraud, waste, abuse, and mismanagement for major contract and project management. This testimony, which is primarily based on GAO reports issued from March 2009 to December 2012, focuses on (1) prior GAO findings on DOE major projects and the impact of recent DOE steps to address project management weaknesses and (2) preliminary observations from GAO's ongoing work on the reasons behind the planned increase in the performance baseline--a project's cost, schedule, and scope--for two projects being constructed as part of NNSA's Plutonium Disposition Program--the MOX facility and the Waste Solidification Building. GAO is making no new recommendations. DOE and NNSA continue to act on the numerous recommendations GAO has made to improve management of the nuclear security enterprise. GAO will continue to monitor DOE's and NNSA's implementation of these recommendations. In response to GAO reports over the past few years on management weaknesses in major projects (i.e., those costing $750 million or more), the Department of Energy (DOE) has undertaken a number of reforms since March 2009, including those overseen by the Office of Environmental Management (EM) and the National Nuclear Security Administration (NNSA). For example, DOE has updated program and project management policies and guidance in an effort to improve the reliability of project cost estimates, better assess project risks, and better ensure project reviews that are timely and useful, and that identify problems early. In addition to actions taken to improve project management, in its 2012 work, GAO has noted DOE's progress in managing the cost and schedule of nonmajor projects--those costing less than $750 million. DOE's actions to improve project management are promising, but their impact on meeting cost and schedule targets is not yet clear. Because all ongoing major projects have been in construction for several years, neither EM nor NNSA has a major project that can demonstrate the impact of DOE's recent reforms. GAO's ongoing review of NNSA's Plutonium Disposition Program, including examining recent problems with the ongoing construction of the Mixed Oxide (MOX) Fuel Fabrication Facility and the Waste Solidification Building at the Savannah River Site in South Carolina, has resulted in some preliminary observations that highlight the need for continued efforts by DOE to improve contract and project management. DOE is currently forecasting an increase in the total project cost for the MOX facility from $4.9 billion to $7.7 billion and a delay in the start of operations from October 2016 to November 2019. Specifically, DOE is evaluating a project baseline change proposal prepared by NNSA's contractor for the MOX facility--a major project. The cost increase and schedule delay will not be known until DOE completes its review of the contractor's proposal and DOE's project oversight office completes an independent cost estimate of the project. With regard to the Waste Solidification Building--a nonmajor project--DOE approved a revised performance baseline in December 2012 to increase the cost from the initial estimate of $344.5 million to $414.1 million and a delay in the start of operations from September 2013 to August 2015. GAO's ongoing work is focused on several areas, including the following: critical system components' design adequacy, understanding the nuclear supplier base, changes in project scope, the effectiveness of project reviews; and lifecycle cost estimates for the Plutonium Disposition Program. GAO plans to report on this ongoing work later this year.
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We defined the financial services industry to include the following sectors: depository credit institutions, which include commercial banks, thrifts (savings and loan associations and savings banks), and credit unions; holdings and trusts, which include investment trusts, investment companies, and holding companies; nondepository credit institutions, which extend credit in the form of loans, and which include federally sponsored credit agencies, personal credit institutions, and mortgage bankers and brokers; the securities sector, which is made up of a variety of firms and organizations (e.g., broker-dealers) that bring together buyers and sellers of securities and commodities, manage investments, and offer financial advice; and the insurance sector, including carriers and insurance agents that provide protection against financial risks to policyholders in exchange for the payment of premiums. The financial services industry is a major source of employment in the United States. EEO-1 data showed that the financial services firms we reviewed for this work, which have 100 or more staff, employed nearly 3 million people in 2004. Moreover, according to the U.S. Bureau of Labor Statistics, employment in the financial services industry was expected to grow at a rate of 1.4 percent annually from 2006 through 2016. EEO-1 data for 1993 through 2006 generally do not show substantial changes in representation by minorities and women at the management level in the financial services industry, but some racial/ethnic minority groups experienced more change in representation than others. Figure 1, which is based on information that we obtained in preparation for our June 2006 report, shows that overall management-level representation by minorities increased from 11.1 percent to 15.5 percent from 1993 through 2004. Specifically, African-Americans increased their representation from 5.6 percent to 6.6 percent, Asians from 2.5 percent to 4.5 percent, Hispanics from 2.8 percent to 4.0 percent, and American Indians from 0.2 to 0.3 percent. Management-level representation by white women was largely unchanged at slightly more than one-third during the period, while representation by white men declined from 52.2 percent to 47.2 percent. As shown in figure 2, EEO-1 data also show that the depository and nondepository credit sectors, as well as the insurance sector, were somewhat more diverse at the management level than the securities and holdings and trust sectors. In 2004, minorities held 19.9 percent of management-level positions in nondepository credit institutions, such as mortgage banks and brokerages, but 12.4 percent in holdings and trusts, such as investment companies. In preparation for this testimony, we contacted EEOC to obtain and analyze EEO-1 for 2006 and found that diversity remained about the same at the management level in the financial services industry (see fig. 3) as it had in previous years. For example, the 2006 EEO-1 data show that African-Americans and Asians represented about 6.4 percent and 5.0 percent, respectively, of all financial services managers in 2006. In addition, the 2006 EEO-1 data show that commercial banks and insurance companies continued to have higher representation by minorities and women at the management level than securities firms. However, it is important to keep in mind that EEO-1 data may actually overstate representation levels for minorities and white women in the most senior-level positions, such as Chief Executive Officers of large investment firms or commercial banks, because the category that captures these positions--"officials and managers"--covers all management positions. Thus, this category includes lower-level positions (e.g., Assistant Manager of a small bank branch) that may have a higher representation of minorities and women. Recognizing this limitation, starting in 2007, EEOC revised its data collection form for employers to divide the "officials and managers" category into two subcategories: "executive/senior-level officers and managers" and "first/midlevel officials." We hope that the increased level of detail will provide a more accurate picture of diversity among senior managers in the financial services industry over time. However, it is too soon to assess the impact of this change on diversity measures at the senior management level. Officials from the firms that we contacted said that their top leadership was committed to implementing workforce diversity initiatives, but they noted that making such initiatives work was challenging. In particular, the officials cited ongoing difficulties in recruiting and retaining minority candidates and in gaining employees' "buy-in" for diversity initiatives, especially at the middle management level. Minorities' rapid growth as a percentage of the overall U.S. population, as well as increased global competition, have convinced some financial services firms that workforce diversity is a critical business strategy. Since the mid-1990s, some financial services firms have implemented a variety of initiatives designed to recruit and retain minority and women candidates to fill key positions. Officials from several banks said that they had developed scholarship and internship programs to encourage minority students to consider careers in banking. Some firms and trade organizations have also developed partnerships with groups that represent minority professionals and with local communities to recruit candidates through events such as conferences and career fairs. To help retain minorities and women, firms have established employee networks, mentoring programs, diversity training, and leadership and career development programs. Industry studies have noted, and officials from some financial services firms we contacted confirmed, that senior managers were involved in diversity initiatives. Some of these officials also said that this level of involvement was critical to success of a program. For example, according to an official from an investment bank, the head of the firm meets with all minority and female senior executives to discuss their career development. Officials from a few commercial banks said that the banks had established diversity "councils" of senior leaders to set the vision, strategy, and direction of diversity initiatives. A 2005 industry trade group study and some officials also noted that some companies were linking managers' compensation with their progress in hiring, promoting, and retaining minority and women employees. A few firms have also developed performance indicators to measure progress in achieving diversity goals. These indicators include workforce representation, turnover, promotion of minority and women employees, and employee satisfaction survey responses. Officials from several financial services firms stated that measuring the results of diversity efforts over time was critical to the credibility of the initiatives and to justifying the investment in the resources such initiatives demanded. While financial services firms and trade groups we contacted had launched diversity initiatives, officials from these organizations, as well as other information, suggest that several challenges may have limited the success of their efforts. These challenges include the following: Recruiting minority and women candidates for management development programs. Available data on minority students enrolled in Master of Business Administration (MBA) programs suggest that the pool of minorities, a source that may feed the "pipeline" for management-level positions within the financial services industry and other industries, is relatively small. In 2000, minorities accounted for 19 percent of all students enrolled in MBA programs in accredited U.S. schools; in 2006, that student population had risen to 25 percent. Financial services firms compete for this relatively small pool not only with one another but also with firms from other industries. Fully leveraging the "internal" pipeline of minority and women employees for management-level positions. As shown in figure 4, there are job categories within the financial services industry that generally have more overall workforce diversity than the "official and managers" category, particularly among minorities. For example, minorities held 22 percent of "professional" positions in the industry in 2004 as compared with 15 percent of "officials and managers" positions. According to a 2006 EEOC report, the professional category represented a possible pipeline of available management-level candidates. The EEOC report states that the chances of minorities and women (white and minority combined) advancing from the professional category into management-level positions is lower when compared with white males. Retaining minority and women candidates that are hired for key management positions. Many industry officials said that financial services firms lack a critical mass of minority men and women, particularly in senior-level positions, to serve as role models. Without a critical mass, the officials said that minority or women employees may lack the personal connections and access to informal networks that are often necessary to navigate an organization's culture and advance their careers. For example, an official from a commercial bank we contacted said he learned from staff interviews that African-Americans believed that they were not considered for promotion as often as others partly because they were excluded from informal employee networks needed for promotion or to promote advancement. Achieving the "buy-in" of key employees, such as middle managers. Middle managers are particularly important to the success of diversity initiatives because they are often responsible for implementing key aspects of such initiatives and for explaining them to other employees. However, some financial services industry officials said that middle managers may be focused on other aspects of their responsibilities, such as meeting financial performance targets, rather than the importance of implementing the organization's diversity initiatives. Additionally, the officials said that implementing diversity initiatives represents a considerable cultural and organizational change for many middle managers and employees at all levels. An official from an investment bank told us that the bank has been reaching out to middle managers who oversaw minority and women employees by, for example, instituting an "inclusive manager program." In closing, despite the implementation of a variety of diversity initiatives over the past 15 years, diversity at the management level in the financial services industry has not changed substantially. Further, diversity at the most senior management positions within the financial services industry may be lower than the overall industry management diversity statistics I have discussed today. While EEOC has taken steps to revise the EEO-1 data to better assess diversity within senior positions, this data may not be available for some period of time. Initiatives to promote management diversity at all levels within financial services firms appear to face several key challenges, such as recruiting and retaining candidates and achieving the "buy-in" of middle managers. Without a sustained commitment to overcome these challenges, management diversity in the financial services industry may continue to remain generally unchanged over time. Mr. Chairman, this concludes my prepared 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 Orice M. Williams on (202) 512-8678 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Wesley M. Phillips, Assistant Director; Emily Chalmers; William Chatlos; Kimberly Cutright; Simin Ho; Marc Molino; and Robert Pollard. 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 the U.S. workforce has become increasingly diverse, many private and public sector organizations have recognized the importance of recruiting and retaining minority and women candidates for key positions. However, previous congressional hearings have raised concerns about a lack of diversity at the management level in the financial services industry, which provides services that are essential to the continued growth and economic prosperity of the country. This testimony discusses findings from a June 2006 GAO report and more recent work on diversity in the financial services industry. Specifically, GAO assesses (1) what the available data show about diversity at the management level from 1993 through 2006 and (2) steps that the industry has taken to promote workforce diversity and the challenges involved. To address the testimony's objectives, GAO analyzed data from the Equal Employment Opportunity Commission (EEOC); reviewed select studies; and interviewed officials from financial services firms, trade organizations, and organizations that represent minority and women professionals. GAO's June 2006 report found that, from 1993 through 2004, overall diversity at the management level in the financial services industry did not change substantially, but some racial/ethnic minority groups experienced more change in representation than others. EEOC data show that management-level representation by minority women and men increased overall from 11.1 percent to 15.5 percent during the period. Specifically, African-Americans increased their representation from 5.6 percent to 6.6 percent, Asians from 2.5 percent to 4.5 percent, Hispanics from 2.8 percent to 4.0 percent, and American Indians from 0.2 percent to 0.3 percent. In preparation for this testimony, GAO collected EEOC data for 2006, which shows that diversity at the management level in the financial services industry remained about the same as it had in previous years. Financial services firms and trade groups have initiated programs to increase workforce diversity, but these initiatives face challenges. The programs include developing scholarships and internships, partnering with groups that represent minority professionals, and linking managers' compensation with their performance in promoting a diverse workforce. Some firms have developed indicators to measure progress in achieving workforce diversity. Industry officials said that among the challenges these initiatives face are recruiting and retaining minority candidates, as well as gaining the "buy-in" of key employees, such as the middle managers who are often responsible for implementing such programs. Without a sustained commitment to overcoming these challenges, diversity at the management level may continue to remain generally unchanged over time.
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The Park Service has about 5,200 housing units which include facilities such as detached single-family homes, multiplexes, apartments, cabins, dormitories, and trailers. These housing units are located in many of the 370 parks throughout the country--although about 70 percent of the housing inventory is located in western parks. In accordance with Office of Management and Budget guidance, the Park Service is authorized to provide park housing to seasonal employees in all locations and to permanent employees (1) whose position description requires them to live in the park to provide needed service or protection or (2) when adequate housing in the local community is not available. In November 1996, the Congress passed the Omnibus Parks and Public Lands Management Act of 1996 (P.L. 104-333). This act required the Park Service to review and revise its employee housing policy and conduct a park-by-park assessment of the condition of and need for park housing units. In response to the act, the agency recently modified its housing policy to state that housing will be provided for those not required to live in the park only when all other alternatives have been exhausted. However, Park Service headquarters officials acknowledged that while the agency is taking the steps needed to implement this policy, it may take a few years for the field units to fully comply. Each park that provides housing is required by the Park Service to have a housing management plan. This plan is to identify the park's need for housing, the condition of housing, and an assessment of the availability and affordability of housing in nearby communities. The agency requires that the parks update their housing management plan every 2 years so that it reflects the current need of the park. Housing management plans are generally approved at the park level by the park superintendent--the senior park official at any park. The plans are not required to be reviewed or approved by agency regional management. In 1993, we reported that the Park Service had not fully justified the need for all of its employee housing. Most park housing is for seasonal employees, employees at isolated parks such as Yellowstone and the Grand Canyon, and employees who are required to live in the park to provide needed service or protection such as law enforcement rangers. In 1993, these employees accounted for about 4,570 of the agency's 5,200 housing units, and the justifications for these housing units appeared adequate. However, there was little if any justification for the 630 remaining housing units for employees located in nonisolated parks who were not required occupants. Some of these housing units were being provided because park managers believed that adequate housing was not affordable in nearby communities. But, in 1993, we found that only 1 of 11 nonisolated parks we visited had prepared the required assessments to show that local housing was not affordable. Furthermore, even though park managers at some of these parks felt that adequate housing was not affordable, the surrounding evidence suggested otherwise. Specifically, about 75 percent of the permanent employees at the 11 nonisolated parks were living in nearby communities. In updating this information for this hearing, we found that while there has been some improvement, many of the same problems we found 4 years ago are still evident today. For example, at a recent sample of 15 parks, we found 7 parks did not have a current assessment of the availability or affordability of housing in nearby communities. Park Service headquarters housing officials have raised concerns that many assessments conducted at local parks are not being performed consistently across the agency. In addition, these officials said that most Park Service employees are not technically qualified to conduct assessments of real estate markets. Furthermore, according to these officials, because of the culture, tradition, and past practices of the agency, park managers may not be able to provide an unbiased objective review of the housing needs at any park. As a result, and in response to the requirements of the Omnibus Parks and Public Lands Management Act of 1996, the agency is in the process of issuing a contract to provide an assessment of housing needs within the Park Service. The contractor will review the justification of those considered required occupants, the availability and affordability of housing in nearby communities, and the condition of existing housing facilities within each park. If funding is available, Park Service officials expect that the contract will be completed and implemented by 2002. Once this contracted assessment is completed, the agency should have a more consistent and objective assessment of its housing needs. At that point, agency headquarters and regional staff can use the findings to better hold park managers accountable for their management of each park's housing program. Today, as in 1993, the Park Service cannot provide detailed support for its backlog of housing needs. In 1993, we reported that the Park Service estimated the backlog to be about $546 million--however, at that time, the agency was not able to provide support for this figure. The 1993 report recommended that the agency develop a repair/replacement estimate that is supportable. Today, the agency estimates that its housing backlog is about $300 million. However, a Park Service housing official acknowledged that this estimate is not based on a park-by-park review of the condition of housing facilities but rather a gross estimate based on the total number of houses whose condition has been rated less than good. (The condition of park housing units are rated either excellent, good, fair, poor, or obsolete.) The Park Service anticipates that it will soon make some progress towards having a supportable housing backlog figure as this is one of the requirements of the upcoming contracted needs/facilities assessment. In response to the requirements of the Omnibus Parks and Public Lands Management Act of 1996, the contractor, among the other items previously discussed, will be required to provide a detailed condition assessment for each housing facility within the parks reviewed. Once the contractor has reviewed all parks where housing is provided, the agency will have a supportable backlog estimate of its housing needs. The contractor is scheduled to complete its work in 2002--9 years after we raised this problem in our 1993 report. As required by the Omnibus Parks and Public Lands Management Act of 1996, the Park Service has reviewed and revised its housing policy. Its new policy puts greater emphasis on the use of government housing as a last resort after all other alternatives have been exhausted. However, while the policy has changed, it has not yet been implemented by park managers. Until that happens, the employee housing program will continue as it has--with individual park managers implementing employee housing programs under broad guidelines with little oversight. As a consequence, there is a wide range of employee housing conditions across the national park system and no assurance that housing decisions are being made in the best interests of the Park Service. In the 15 park units we recently surveyed, park managers took a variety of approaches to providing employee housing. Among the sample of parks, we found wide disparities in the quality of the analysis of local housing markets. For example, at Harpers Ferry National Historical Park, the housing management plan provided no analysis of the local housing market. Instead, it simply provided a description of the local situation stating that: "rental units are very difficult to find . . . single income park employees find it difficult to secure adequate housing." Without supporting analysis, there is no way to determine the validity of this assertion. In comparison, the analysis of local housing markets that accompanied the housing management plan for Santa Monica National Recreation Area was an in-depth analysis prepared by a contractor and exceeded 35 pages. Similarly, at Arches National Park the housing analysis included an in-depth assessment of the local housing market and rental rates as well as an evaluation of the population and economic base of the surrounding area. Furthermore, we found that for 7 of the 15 parks we sampled, assessments of local housing markets were either out of date or had not been done. Another indication of the broad discretion given to individual park managers is how housing units are allocated to employees. Beyond those employees whose position descriptions require them to live in the park, park managers use a variety of methods to determine which employees are provided park housing. These allocation methods include lotteries as well as a variety of ranking systems that give weight to such factors as length of employment, salary, size of family, and number and/or gender of children. The net effect of this is that housing decisions are not made consistently across the national park system. The significance of the broad discretion given to individual park managers is that the potential exists for housing decisions to be made that may not be in the best interest of the agency. This is best illustrated by some recent work done by the Department of the Interior's Office of the Inspector General at the Grand Canyon. The Interior Inspector General's Office reported in 1996 that in constructing employee housing at the Grand Canyon, a park manager decided to build 59 single-family houses. At the time of the report, these houses were in the process of being constructed, and many of them had already been completed. According to the report, the decision to build single-family houses was made despite advice from the Park Service regional office and others that building a mix of 114 single-family and multi-family units would better address the park's overcrowded, unsafe, and substandard housing conditions. According to the report, by building the single-family units, approximately 50 permanent and 100 seasonal employees would still be living in substandard housing at the completion of the construction. In responding to this point, the park manager at the Grand Canyon stated that it was never the park's intention to only build single-family houses and that a mix of multi-family dwellings would be constructed at a later time. Nonetheless, the park manager's decision has resulted in more employees living in substandard housing units for a greater period of time. Furthermore, in reviewing records concerning the project's justification for the high quality of materials, the Interior Inspector General reported that the contracted architectural and engineering firm noted that costs would drop significantly "if some of the top-of-the-line items that the Park is insisting on, i.e., doors and windows, could be lowered a notch in quality." The report stated that this proposal was not studied nor taken by the park. The park's decision on these matters is difficult to understand when budgets are so tight and the agency is faced with large maintenance backlogs and cutbacks in park services. The Park Service has taken a different approach to employee housing in comparison to BLM and the Forest Service. While all three are responsible for managing and protecting federal lands, the Park Service provides a much larger portion of its employees with housing than the other two agencies. Also, the Park Service's housing inventory contains proportionately more houses, multiplex units, and apartments and fewer dormitories and cabins than the other two agencies. The sheer number and mix of the Park Service's inventory combine to produce higher initial construction costs and recurring maintenance costs for the agency. Compared with the Forest Service and BLM, the Park Service mission emphasizes providing more in-park visitor services such as law enforcement, search and rescue and other supporting activities. As such, the Park Service believes that it needs to provide a larger number of its employees with in-park housing. In 1994, we reported that the Park Service had 23,908 employees and had about 4,718 housing units or about one housing unit for every 5 employees. In comparison, the Forest Service had 50,877 employees and 4,402 housing units or about one unit for every 11 employees. BLM had 11,861 employees and 206 housing units or about one unit for every 58 employees. Another indication of the variance in the agencies' housing programs is the extent to which the agencies require their employees to live on-site. In 1994, the Park Service required about 1,400 employees (about 9 percent of its permanent employees) to live on-site in park housing to provide necessary visitor services, protect government property and resources, or both. In marked contrast, according to agency officials, the Forest Service required about 70 employees--less than 1 percent of its permanent employees--to live on-site in government housing. BLM had only two employees who were required to live on-site. About 75 percent of the Park Service's housing inventory is composed of single-family and multiplex units compared with about 50 and 26 percent, respectively, for the Forest Service and BLM. In part, because of the Park Service's mix of housing types, the agency has experienced far higher repair and rehabilitation costs. For example, in 1993, we reported that the Park Service estimated a backlog of $546 million for repairs, rehabilitation, and replacement of its housing inventory; whereas the Forest Service, having about the same number of units but a different mix, had a backlog of less than a third of the Park Service. A Park Service official had a difficult time substantiating the difference beyond the fact that only a portion of the difference resulted from the agency's higher rehabilitation and construction standards and higher costs associated with rehabilitating units classified as historic structures. Furthermore, in 1994 we reported that of the three agencies, only the Park Service plans to replace and upgrade its housing. Although the Forest Service and BLM do not plan to stop providing housing altogether, both plan to minimize their involvement in providing housing to employees and instead rely more upon private sector housing. Among the reasons the Forest Service and BLM are minimizing housing is that (1) their current housing inventories were too expensive to maintain, (2) previous justifications for providing housing were no longer valid, (3) better roads have made it easier for employees to live in nearby communities, and (4) employees have shown a preference for living in private residences. In closing, the Park Service has been slow to resolve problems that we have identified in past reports. It has taken an act of Congress to move the agency to review and revise its housing policies and make arrangements to determine its need for and condition of its housing inventory. By taking these steps, the agency appears to be on the right track toward making progress in key areas. However, it's clear that continued congressional attention is needed to ensure that the Park Service is held accountable to provide housing only where it is absolutely necessary and appropriately justified. Mr. Chairman, this concludes my statement. I would be happy to answer questions from you or any other Members of the Subcommittee. 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 its past work on National Park Service (NPS) employee housing issues. GAO noted that: (1) NPS has not clearly justified the need for all of its employee housing units; (2) the agency requires parks to perform needs assessments to justify its housing; (3) however, these assessments may not be in-depth, objective, nor performed consistently from park to park; (4) in response to the Omnibus Parks and Public Lands Management Act of 1996, the agency is beginning to assess the need for its housing units; however, this process is not scheduled to be completed until 2002--9 years after GAO recommended such assessments; (5) NPS has not been able to provide detailed support for its backlog for repairing and replacing its housing inventory; (6) in 1993, GAO reported that the agency estimated its housing backlog at $546 million; however, NPS could not support this figure; (7) today, the agency estimates its housing backlog to be about $300 million; however, NPS acknowledges that this figure is not based on a detailed assessment of its housing repair and maintenance needs but rather a gross estimate based on the total number of houses whose conditions have been rated less than good; (8) individual park managers have broad discretion in implementing park housing policy, resulting in inconsistencies in how the program is managed across the agency and raising questions about whether housing decisions are being made in the best interest of the agency; (9) other federal land management agencies such as the Forest Service and the Bureau of Land Management (BLM) do not provide the same level of housing to their employees; (10) because its mission emphasizes providing more in-park visitor services than the other agencies, NPS believes that it needs to provide a larger number of its employees with in-park housing; (11) for example, in 1994 GAO reported that NPS had one unit for every 5 employees, while the Forest Service had one unit for every 11 employees and the BLM had one unit for every 58 employees; (12) when compared with the other agencies, the NPS mix of housing units has relatively more houses, multiplex units, and apartments and relatively fewer dormitories and cabins, and because of this, the NPS housing inventory is more costly to maintain.
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When used for personal identification, biometric technologies measure and analyze human physiological and behavioral characteristics. Identifying a person's physiological characteristics is based on direct measurement of a part of the body--fingertips, hand geometry, facial geometry, and eye retinas and irises. The corresponding biometric technologies are fingerprint recognition, hand geometry, and facial, retina, and iris recognition. Identifying behavioral characteristics is based on data derived from actions, such as speech and signature, the corresponding biometrics being speaker recognition and signature recognition. Biometrics can theoretically be very effective personal identifiers because the characteristics they measure are thought to be distinct to each person. Unlike conventional identification methods that use something you have, such as an identification card to gain access to a building, or something you know, such as a password to log on to a computer system, these characteristics are integral to something you are. Because they are tightly bound to an individual, they are more reliable, cannot be forgotten, and are less easily lost, stolen, or guessed. Biometric technologies vary in complexity, capabilities, and performance, but all share several elements. Biometric identification systems are essentially pattern recognition systems. They use acquisition devices such as cameras and scanning devices to capture images, recordings, or measurements of an individual's characteristics and computer hardware and software to extract, encode, store, and compare these characteristics. Because the process is automated, biometric decision-making is generally very fast, in most cases taking only a few seconds in real time. Depending on the application, biometric systems can be used in one of two modes: verification or identification. Verification--also called authentication--is used to verify a person's identity--that is, to authenticate that individuals are who they say they are. Identification is used to establish a person's identity--that is, to determine who a person is. Although biometric technologies measure different characteristics in substantially different ways, all biometric systems involve similar processes that can be divided into two distinct stages: enrollment and verification or identification. In enrollment, a biometric system is trained to identify a specific person. The person first provides an identifier, such as an identity card. The biometric is linked to the identity specified on the identification document. He or she then presents the biometric (e.g., fingertips, hand, or iris) to an acquisition device. The distinctive features are located and one or more samples are extracted, encoded, and stored as a reference template for future comparisons. Depending on the technology, the biometric sample may be collected as an image, a recording, or a record of related dynamic measurements. How biometric systems extract features and encode and store information in the template is based on the system vendor's proprietary algorithms. Template size varies depending on the vendor and the technology. Templates can be stored remotely in a central database or within a biometric reader device itself; their small size also allows for storage on smart cards or tokens. Minute changes in positioning, distance, pressure, environment, and other factors influence the generation of a template, making each template likely to be unique, each time an individual's biometric data are captured and a new template is generated. Consequently, depending on the biometric system, a person may need to present biometric data several times in order to enroll. Either the reference template may then represent an amalgam of the captured data or several enrollment templates may be stored. The quality of the template or templates is critical in the overall success of the biometric application. Because biometric features can change over time, people may have to reenroll to update their reference template. Some technologies can update the reference template during matching operations. The enrollment process also depends on the quality of the identifier the enrollee presents. The reference template is linked to the identity specified on the identification document. If the identification document does not specify the individual's true identity, the reference template will be linked to a false identity. In verification systems, the step after enrollment is to verify that a person is who he or she claims to be (i.e., the person who enrolled). After the individual provides whatever identifier he or she enrolled with, the biometric is presented, which the biometric system captures, generating a trial template that is based on the vendor's algorithm. The system then compares the trial biometric template with this person's reference template, which was stored in the system during enrollment, to determine whether the individual's trial and stored templates match (see figure 1). Verification is often referred to as 1:1 (one-to-one) matching. Verification systems can contain databases ranging from dozens to millions of enrolled templates but are always predicated on matching an individual's presented biometric against his or her reference template. Nearly all verification systems can render a match-no-match decision in less than a second. A system that requires employees to authenticate their claimed identities before granting them access to secure buildings or to computers is a verification application. In identification systems, the step after enrollment is to identify who the person is. Unlike verification systems, no identifier need be provided. To find a match, instead of locating and comparing the person's reference template against his or her presented biometric, the trial template is compared against the stored reference templates of all individuals enrolled in the system (see figure 2). Identification systems are referred to as 1:N (one-to-N, or one-to-many) matching because an individual's biometric is compared against multiple biometric templates in the system's database. There are two types of identification systems: positive and negative. Positive identification systems are designed to ensure that an individual's biometric is enrolled in the database. The anticipated result of a search is a match. A typical positive identification system controls access to a secure building or secure computer by checking anyone who seeks access against a database of enrolled employees. The goal is to determine whether a person seeking access can be identified as having been enrolled in the system. Negative identification systems are designed to ensure that a person's biometric information is not present in a database. The anticipated result of a search is a nonmatch. Comparing a person's biometric information against a database of all who are registered in a public benefits program, for example, can ensure that this person is not "double dipping" by using fraudulent documentation to register under multiple identities. Another type of negative identification system is a surveillance system that uses a watch list. Such systems are designed to identify people on the watch list and alert authorities for appropriate action. For all other people, the system is to check that they are not on the watch list and allow them normal passage. The people whose biometrics are in the database in these systems may not have provided them voluntarily. For instance, for a surveillance system, the biometrics may be faces captured from mug shots provided by a law enforcement agency. No match is ever perfect in either a verification or an identification system, because every time a biometric is captured, the template is likely to be unique. Therefore, biometric systems can be configured to make a match or no-match decision, based on a predefined number, referred to as a threshold, that establishes the acceptable degree of similarity between the trial template and the enrolled reference template. After the comparison, a score representing the degree of similarity is generated, and this score is compared to the threshold to make a match or no-match decision. Depending on the setting of the threshold in identification systems, sometimes several reference templates can be considered matches to the trial template, with the better scores corresponding to better matches. Retina Recognition Signature Recognition Speaker Recognition Facial recognition technology identifies people by analyzing features of the face not easily altered--the upper outlines of the eye sockets, the areas around the cheekbones, and the sides of the mouth. The technology is typically used to compare a live facial scan to a stored template, but it can also be used in comparing static images such as digitized passport photographs. Facial recognition can be used in both verification and identification systems. In addition, because facial images can be captured from video cameras, facial recognition is the only biometric that can be used for surveillance purposes. Fingerprint recognition is one of the best known and most widely used biometric technologies. Automated systems have been commercially available since the early 1970s, and at the time of our study, we found there were more than 75 fingerprint recognition technology companies. Until recently, fingerprint recognition was used primarily in law enforcement applications. Fingerprint recognition technology extracts features from impressions made by the distinct ridges on the fingertips. The fingerprints can be either flat or rolled. A flat print captures only an impression of the central area between the fingertip and the first knuckle; a rolled print captures ridges on both sides of the finger. An image of the fingerprint is captured by a scanner, enhanced, and converted into a template. Scanner technologies can be optical, silicon, or ultrasound technologies. Ultrasound, while potentially the most accurate, has not been demonstrated in widespread use. Last year, we found that optical scanners were the most commonly used. During enhancement, "noise" caused by such things as dirt, cuts, scars, and creases or dry, wet, or worn fingerprints is reduced, and the definition of the ridges is enhanced. Approximately 80 percent of vendors base their algorithms on the extraction of minutiae points relating to breaks in the ridges of the fingertips. Other algorithms are based on extracting ridge patterns. Hand geometry systems have been in use for almost 30 years for access control to facilities ranging from nuclear power plants to day care centers. Hand geometry technology takes 96 measurements of the hand, including the width, height, and length of the fingers; distances between joints; and shapes of the knuckles. Hand geometry systems use an optical camera and light-emitting diodes with mirrors and reflectors to capture two orthogonal two-dimensional images of the back and sides of the hand. Although the basic shape of an individual's hand remains relatively stable over his or her lifetime, natural and environmental factors can cause slight changes. Iris recognition technology is based on the distinctly colored ring surrounding the pupil of the eye. Made from elastic connective tissue, the iris is a very rich source of biometric data, having approximately 266 distinctive characteristics. These include the trabecular meshwork, a tissue that gives the appearance of dividing the iris radially, with striations, rings, furrows, a corona, and freckles. Iris recognition technology uses about 173 of these distinctive characteristics. Formed during the 8th month of gestation, these characteristics reportedly remain stable throughout a person's lifetime, except in cases of injury. Iris recognition can be used in both verification and identification systems. Iris recognition systems use a small, high-quality camera to capture a black and white, high-resolution image of the iris. The systems then define the boundaries of the iris, establish a coordinate system over the iris, and define the zones for analysis within the coordinate system. Retina recognition technology captures and analyzes the patterns of blood vessels on the thin nerve on the back of the eyeball that processes light entering through the pupil. Retinal patterns are highly distinctive traits. Every eye has its own totally unique pattern of blood vessels; even the eyes of identical twins are distinct. Although each pattern normally remains stable over a person's lifetime, it can be affected by disease such as glaucoma, diabetes, high blood pressure, and autoimmune deficiency syndrome. The fact that the retina is small, internal, and difficult to measure makes capturing its image more difficult than most biometric technologies. An individual must position the eye very close to the lens of the retina-scan device, gaze directly into the lens, and remain perfectly still while focusing on a revolving light while a small camera scans the retina through the pupil. Any movement can interfere with the process and can require restarting. Enrollment can easily take more than a minute. Signature recognition authenticates identity by measuring handwritten signatures. The signature is treated as a series of movements that contain unique biometric data, such as personal rhythm, acceleration, and pressure flow. Unlike electronic signature capture, which treats the signature as a graphic image, signature recognition technology measures how the signature is signed. In a signature recognition system, a person signs his or her name on a digitized graphics tablet or personal digital assistant. The system analyzes signature dynamics such as speed, relative speed, stroke order, stroke count, and pressure. The technology can also track each person's natural signature fluctuations over time. The signature dynamics information is encrypted and compressed into a template. Differences in how different people's voices sound result from a combination of physiological differences in the shape of vocal tracts and learned speaking habits. Speaker recognition technology uses these differences to discriminate between speakers. During enrollment, speaker recognition systems capture samples of a person's speech by having him or her speak some predetermined information into a microphone a number of times. This information, known as a passphrase, can be a piece of information such as a name, birth month, birth city, or favorite color or a sequence of numbers. Text independent systems are also available that recognize a speaker without using a predefined phrase. This phrase is converted from analog to digital format, and the distinctive vocal characteristics, such as pitch, cadence, and tone, are extracted, and a speaker model is established. A template is then generated and stored for future comparisons. Speaker recognition can be used to verify a person's claimed identity or to identify a particular person. It is often used where voice is the only available biometric identifier, such as telephone and call centers. Biometrics is a very young technology, having only recently reached the point at which basic matching performance can be acceptably deployed. It is necessary to analyze several metrics to determine the strengths and weaknesses of each technology and vendor for a given application. The three key performance metrics are false match rate (FMR), false nonmatch rate (FNMR), and failure to enroll rate (FTER). A false match occurs when a system incorrectly matches an identity, and FMR is the probability of individuals being wrongly matched. In verification and positive identification systems, unauthorized people can be granted access to facilities or resources as the result of incorrect matches. In a negative identification system, the result of a false match may be to deny access. For example, if a new applicant to a public benefits program is falsely matched with a person previously enrolled in that program under another identity, the applicant may be denied access to benefits. A false nonmatch occurs when a system rejects a valid identity, and FNMR is the probability of valid individuals being wrongly not matched. In verification and positive identification systems, people can be denied access to some facility or resource as the result of a system's failure to make a correct match. In negative identification systems, the result of a false nonmatch may be that a person is granted access to resources to which she should be denied. For example, if a person who has enrolled in a public benefits program under another identity is not correctly matched, she will succeed in gaining fraudulent access to benefits. False matches may occur because there is a high degree of similarity between two individuals' characteristics. False nonmatches occur because there is not a sufficiently strong similarity between an individual's enrollment and trial templates, which could be caused by any number of conditions. For example, an individual's biometric data may have changed as a result of aging or injury. If biometric systems were perfect, both error rates would be zero. However, because biometric systems cannot identify individuals with 100 percent accuracy, a trade-off exists between the two. False match and nonmatch rates are inversely related; they must therefore always be assessed in tandem, and acceptable risk levels must be balanced with the disadvantages of inconvenience. For example, in access control, perfect security would require denying access to everyone. Conversely, granting access to everyone would result in denying access to no one. Obviously, neither extreme is reasonable, and biometric systems must operate somewhere between the two. For most applications, how much risk one is willing to tolerate is the overriding factor, which translates into determining the acceptable FMR. The greater the risk entailed by a false match, the lower the tolerable FMR. For example, an application that controlled access to a secure area would require that the FMR be set low, which would result in a high FNMR. However, an application that controlled access to a bank's ATM might have to sacrifice some degree of security and set a higher FMR (and hence a lower FNMR) to avoid the risk of irritating legitimate customers by wrongly rejecting them. As figure 3 shows, selecting a lower FMR increases the FNMR. Perfect security would require setting the FMR to 0, in which case the FNMR would be 1. At the other extreme, setting the FNMR to 0 would result in an FMR of 1. Vendors often use equal error rate (EER), an additional metric derived from FMR and FNMR, to describe the accuracy of their biometric systems. EER refers to the point at which FMR equals FNMR. Setting a system's threshold at its EER will result in the probability that a person is falsely matched equaling the probability that a person is falsely not matched. However, this statistic tends to oversimplify the balance between FMR and FNMR, because in few real-world applications is the need for security identical to the need for convenience. FTER is a biometric system's third critical accuracy metric. FTER measures the probability that a person will be unable to enroll. Failure to enroll (FTE) may stem from an insufficiently distinctive biometric sample or from a system design that makes it difficult to provide consistent biometric data. The fingerprints of people who work extensively at manual labor are often too worn to be captured. A high percentage of people are unable to enroll in retina recognition systems because of the precision such systems require. People who are mute cannot use voice systems, and people lacking fingers or hands from congenital disease, surgery, or injury cannot use fingerprint or hand geometry systems. Although between 1 and 3 percent of the general public does not have the body part required for using any one biometric system, they are normally not counted in a system's FTER. Because biometric systems based solely on a single biometric may not always meet performance requirements, the development of systems that integrate two or more biometrics is emerging as a trend. Multiple biometrics could be two types of biometrics, such as combining facial and iris recognition. Multiple biometrics could also involve multiple instances of a single biometric, such as 1, 2, or 10 fingerprints, 2 hands, and 2 eyes. One prototype system integrates fingerprint and facial recognition technologies to improve identification. A commercially available system combines face, lip movement, and speaker recognition to control access to physical structures and small office computer networks. Depending on the application, both systems can operate for either verification or identification. Experimental results have demonstrated that the identities established by systems that use more than one biometric could be more reliable, be applied to large target populations, and improve response time. Biometrics have been used in several federal applications including access control to facilities and computers, criminal identification, and border security. In the last 2 years, laws have been passed that will require a more extensive use of biometric technologies in the federal government. Biometric systems have long been used to complement or replace badges and keys in controlling access to entire facilities or specific areas within a facility. The entrances to more than half the nuclear power plants in the United States employ biometric hand geometry systems. Figure 4 illustrates the use of fingerprint recognition for physical access. As noted in our technology assessment, recent reductions in the price of biometric hardware have spurred logical access control applications. Fingerprint, iris, and speaker recognition are replacing passwords to authenticate individuals accessing computers and networks. The Office of Legislative Counsel of the U.S. House of Representatives, for example, is using an iris recognition system to protect confidential files and working documents. Other federal agencies, including the Department of Defense, Department of Energy, and Department of Justice, as well as the intelligence community, are adopting similar technologies. The Department of Homeland Security's Transportation Security Administration (TSA) is working to establish a systemwide common credential to be used across all transportation modes for all personnel requiring unescorted physical and/or logical access to secure areas of the national transportation system, such as airports, seaports, and railroad terminals. Called the Transportation Worker Identification Credential (TWIC), the program was developed in response to recent laws and will include the use of smart cards and biometrics to provide a positive match of a credential to a person for 10-15 million transportation workers across the United States. Fingerprint identification has been used in law enforcement over the past 100 years and has become the de facto international standard for positively identifying individuals. The Federal Bureau of Investigation (FBI) has been using fingerprint identification since 1928. The first fingerprint recognition systems were used in law enforcement about 4 decades ago. The FBI's Integrated Automated Fingerprint Identification System (IAFIS) is an automated 10-fingerprint matching system that stores rolled fingerprints. The more than 40 million records in its criminal master file are connected electronically with all 50 states and some federal agencies. IAFIS was designed to handle a large volume of fingerprint checks against a large database of fingerprints. Last year, we found that IAFIS processes, on average, approximately 48,000 fingerprints per day and has processed as many as 82,000 in a single day. IAFIS's target response time for criminal fingerprints submitted electronically is 2 hours; for civilian fingerprint background checks, 24 hours. The Immigration and Naturalization Service (INS) began developing the Automated Biometric Fingerprint Identification System (IDENT) around 1990 to identify illegal aliens who are repeatedly apprehended trying to enter the United States illegally. INS's goal was to enroll virtually all apprehended aliens. IDENT can also identify aliens who have outstanding warrants or who have been deported. When such aliens are apprehended, a photograph and two index fingerprints are captured electronically and queried against three databases (see figure 5). IDENT has over 4.5 million entries. A fingerprint query of IDENT normally takes about 2 minutes. IDENT is also being used as a part of the National Security Entry-Exit Registration System (NSEERS) that was implemented last year. INS Passenger Accelerated Service System (INSPASS), a pilot program in place since 1993, has more than 45,000 frequent fliers enrolled at nine airports, and has admitted more than 300,000 travelers. It is open to citizens of the United States, Canada, Bermuda, and visa waiver program countries who travel to the United States on business three or more times a year. INSPASS permits frequent travelers to circumvent customs procedures and immigration lines. To participate, users undergo a background screening and registration. Once enrolled, they can present their biometric at an airport kiosk for comparison against a template stored in a central database. In a joint INS and State Department effort to comply with the Illegal Immigration Reform and Immigrant Responsibility Act of 1996, every border crossing card issued after April 1, 1998, contains a biometric identifier and is machine-readable. The cards, also called laser visas, allow Mexican citizens to enter the United States for the purpose of business or pleasure without being issued further documentation and stay for 72 hours or less, going no farther than 25 miles from the border. Consular staff in Mexico photograph applicants and take prints of the two index fingers and then electronically forward applicants' data to INS. Both State and INS conduct checks on each applicant, and the fingerprints are compared with prints of previously enrolled individuals to ensure that the applicant is not applying for multiple cards under different names. The cards store a holder's identifying information along with a digital image of his or her picture and the minutiae of the two index fingerprints. As of May 2002, State had issued more than 5 million cards. The Department of State has been running pilots of facial recognition technology at 23 overseas consular posts for several years. As a visa applicant's information is entered into the local system at the posts and replicated in State's Consular Consolidated Database (CCD), the applicant's photograph is compared with the photographs of previous applicants stored in CCD to prevent fraudulent attempts to obtain visas. Some photographs are also being compared to a watch list. Laws passed in the last 2 years require a more extensive use of biometrics for border control. The Attorney General and the Secretary of State jointly, through the National Institute of Standards and Technology (NIST) are to develop a technology standard, including biometric identifier standards. When developed, this standard is to be used to verify the identity of persons applying for a U.S. visa for the purpose of conducting a background check, confirming identity, and ensuring that a person has not received a visa under a different name. By October 26, 2004, the Departments of State and Justice are to issue to aliens only machine- readable, tamper-resistant visas and other travel and entry documents that use biometric identifiers. At the same time, Justice is to install at all ports of entry equipment and software that allow the biometric comparison and authentication of all U.S. visas and other travel and entry documents issued to aliens and machine-readable passports. The Department of Homeland Security is developing the United States Visitor and Immigrant Status Indication Technology (US-VISIT) system to address this requirement. While biometric technology is currently available and used in a variety of applications, questions remain regarding the technical and operational effectiveness of biometric technologies in large-scale applications. We have found that a risk management approach can help define the need and use for biometrics for security. In addition, a decision to use biometrics should consider the costs and benefits of such a system and its potential effect on convenience and privacy. The approach to good security is fundamentally similar, regardless of the assets being protected, whether information systems security, building security, or homeland security. As we have previously reported, these principles can be reduced to five basic steps that help to determine responses to five essential questions (see figure 6). What Am I Protecting? The first step in risk management is to identify assets that must be protected and the impact of their potential loss. Who Are My Adversaries? The second step is to identify and characterize the threat to these assets. The intent and capability of an adversary are the principal criteria for establishing the degree of threat to these assets. Step three involves identifying and characterizing vulnerabilities that would allow identified threats to be realized. In other words, what weaknesses can allow a security breach? What Are My Priorities? In the fourth step, risk must be assessed and priorities determined for protecting assets. Risk assessment examines the potential for the loss or damage to an asset. Risk levels are established by assessing the impact of the loss or damage, threats to the asset, and vulnerabilities. What Can I Do? The final step is to identify countermeasures to reduce of eliminate risks. In doing so, the advantages and benefits of these countermeasures must also be weighed against their disadvantages and costs. Countermeasures identified through the risk management process support the three integral concepts of a holistic security program: protection, detection, and reaction. Protection provides countermeasures such as policies, procedures, and technical controls to defend against attacks on the assets being protected. Detection monitors for potential breakdowns in protective mechanisms that could result in security breaches. Reaction, which requires human involvement, responds to detected breaches to thwart attacks before damage can be done. Because absolute protection is impossible to achieve, a security program that does not incorporate detection and reaction is incomplete. Biometrics can support the protection component of a security program. It is important to realize that deploying them will not automatically eliminate all security risks. Technology is not a solution in isolation. Effective security also entails having a well-trained staff to follow and enforce policies and procedures. Weaknesses in the security process or failures by people to operate the technology or implement the security process can diminish the effectiveness of technology. Furthermore, there is a need for the security process to account for limitations in technology. Biometrics can help ensure that people can only enroll into a security system once and to ensure that a person presenting himself before the security system is the same person that enrolled into the system. However, biometrics cannot necessarily link a person to his or her true identity. While biometrics would make it more difficult for people to establish multiple identities, if the one identity a person claimed were not his or her true identity, then the person would be linked to the false identity in the biometric system. The quality of the identifier presented during the enrollment process is key to the integrity of a biometrics system. Procedures for exception processing would also need to be carefully planned. As we described, not all people can enroll in a biometrics system. Similarly, false matches and false nonmatches will also sometimes occur. Procedures need to be developed to handle these situations. Exception processing that is not as good as biometric-based primary processing could be exploited as a security hole. A decision to use biometrics in a security solution should also consider the benefits and costs of the system and the potential effects on convenience and privacy. Best practices for information technology investment dictate that prior to making any significant project investment, the benefit and cost information of the system should be analyzed and assessed in detail. A business case should be developed that identifies the organizational needs for the project and a clear statement of high-level system goals should be developed. The high-level goals should address the system's expected outcomes such as the binding of a biometric feature to an identity or the identification of undesirable individuals on a watch list. Certain performance parameters should also be specified such as the time required to verify a person's identity or the maximum population that the system must handle. Once the system parameters are developed, a cost estimate can be developed. Not only must the costs of the technology be considered, but also the costs of the effects on people and processes. Both initial costs and recurring costs need to be estimated. Initial costs need to account for the engineering efforts to design, develop, test, and implement the system; training of personnel; hardware and software costs; network infrastructure improvements; and additional facilities required to enroll people into the biometric system. Recurring cost elements include program management costs, hardware and software maintenance, hardware replacement costs, training of personnel, additional personnel to enroll or verify the identities of people in the biometric system, and possibly the issuance of token cards for the storage of biometrics. Weighed against these costs are the security benefits that accrue from the system. Analyzing this cost-benefit trade-off is crucial when choosing specific biometrics-based solutions. The consequences of performance issues--for example, accuracy problems, and their effect on processes and people--are also important in selecting a biometrics solution. The Privacy Act of 1974 limits federal agencies' collection, use, and disclosure of personal information, such as fingerprints and photographs. Accordingly, the Privacy Act generally covers federal agency use of personal biometric information. However, the act includes exemptions for law enforcement and national security purposes. Representatives of civil liberties groups and privacy experts have expressed concerns regarding (1) the adequacy of protections for security, data sharing, identity theft, and other identified uses of biometric data and (2) secondary uses and "function creep." These concerns relate to the adequacy of protections under current law for large-scale data handling in a biometric system. Besides information security, concern was voiced about an absence of clear criteria for governing data sharing. The broad exemptions of the Privacy Act, for example, provide no guidance on the extent of the appropriate uses law enforcement may make of biometric information. Because there is no general agreement on the appropriate balance of security and privacy to build into a system using biometrics, further policy decisions are required. The range of unresolved policy issues suggests that questions surrounding the use of biometric technology center as much on management policies as on technical issues. Finally, consideration must be given to the convenience and ease of using biometrics and their effect on the ability of the agency to complete its mission. For example, some people find biometric technologies difficult, if not impossible, to use. Still others resist biometrics because they believe them to be intrusive, inherently offensive, or just uncomfortable to use. Lack of cooperation or even resistance to using biometrics can affect a system's performance and widespread adoption. Furthermore, if the processes to use biometrics are lengthy or erroneous, they could negatively affect the ability of the assets being protected to operate and fulfill its mission. For example, last year, we found that there are significant challenges in using biometrics for border security. The use of biometric technologies could potentially impact the length of the inspection process. Any lengthening in the process of obtaining travel documents or entering the United States could affect travelers significantly. Delays inconvenience travelers and could result in fewer visits to the United States or lost business to the nation. Further studies could help determine whether the increased security from biometrics could result in fewer visits to the United States or lost business to the nation, potentially adversely affecting the American economy and, in particular, the border communities. These communities depend on trade with Canada and Mexico, which totaled $653 billion in 2000. In conclusion, biometric technologies are available today that can be used in security systems to help protect assets. However, it is important to bear in mind that effective security cannot be achieved by relying on technology alone. Technology and people must work together as part of an overall security process. As we have pointed out, weaknesses in any of these areas diminishes the effectiveness of the security process. We have found that three key considerations need to be addressed before a decision is made to design, develop, and implement biometrics into a security system: 1. Decisions must be made on how the technology will be used. 2. A detailed cost-benefit analysis must be conducted to determine that the benefits gained from a system outweigh the costs. 3. A trade-off analysis must be conducted between the increased security, which the use of biometrics would provide, and the effect on areas such as privacy and convenience. Security concerns need to be balanced with practical cost and operational considerations as well as political and economic interests. A risk management approach can help federal agencies identify and address security concerns. As federal agencies consider the development of security systems with biometrics, they need to define what the high-level goals of this system would be and develop the concept of operations that will embody the people, process, and technologies required to achieve these goals. With these answers, the proper role of biometric technologies in security can be determined. If these details are not resolved, the estimated cost and performance of the resulting system will be at risk. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or members of the subcommittee may have. For further information, please contact Keith Rhodes at (202)-512-6412 or Richard Hung at (202)-512-8073. 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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One of the primary functions of any security system is the control of people into or out of protected areas, such as physical buildings, information systems, and our national border. Technologies called biometrics can automate the identification of people by one or more of their distinct physical or behavioral characteristics. The term biometrics covers a wide range of technologies that can be used to verify identity by measuring and analyzing human characteristics--relying on attributes of the individual instead of things the individual may have or know. In the last 2 years, laws have been passed that will require a more extensive use of biometric technologies in the federal government. Last year, GAO conducted a technology assessment on the use of biometrics for border security. GAO was asked to testify about the issues that it raised in the report, the use of biometrics in the federal government, and the current state of the technology. Biometric technologies are available today that can be used in security systems to help protect assets. Biometric technologies vary in complexity, capabilities, and performance and can be used to verify or establish a person's identity. Leading biometric technologies include facial recognition, fingerprint recognition, hand geometry, iris recognition, retina recognition, signature recognition, and speaker recognition. Biometric technologies have been used in federal applications such as access control, criminal identification, and border security. However, it is important to bear in mind that effective security cannot be achieved by relying on technology alone. Technology and people must work together as part of an overall security process. Weaknesses in any of these areas diminishes the effectiveness of the security process. The security process needs to account for limitations in biometric technology. For example, some people cannot enroll in a biometrics system. Similarly, errors sometimes occur during matching operations. Procedures need to be developed to handle these situations. Exception processing that is not as good as biometric-based primary processing could also be exploited as a security hole. We have found that three key considerations need to be addressed before a decision is made to design, develop, and implement biometrics into a security system: (1) decisions must be made on how the technology will be used; (2) a detailed cost-benefit analysis must be conducted to determine that the benefits gained from a system outweigh the costs; and (3) a trade-off analysis must be conducted between the increased security, which the use of biometrics would provide, and the effect on areas such as privacy and convenience. Security concerns need to be balanced with practical cost and operational considerations as well as political and economic interests. A risk management approach can help federal agencies identify and address security concerns. As federal agencies consider the development of security systems with biometrics, they need to define what the high-level goals of this system will be and develop the concept of operations that will embody the people, process, and technologies required to achieve these goals. With these answers, the proper role of biometric technologies in security can be determined. If these details are not resolved, the estimated cost and performance of the resulting system will be at risk.
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State annually receives over $400 million in appropriated funds for buying and maintaining buildings abroad. It also has legislative authority to sell its real estate and use the proceeds to buy or improve other real estate and furnishings without further congressional approval. State's Office of Foreign Buildings Operations (FBO) is responsible for establishing and overseeing policies and procedures for State's real property, including approving the disposition of excess, underutilized, or uneconomical properties. These responsibilities are carried out in cooperation with the embassies. From 1990 to 1995, State made real estate sales totaling $133 million, including $48.8 million from the forced sale of property and property rights in Singapore because of road construction. If you exclude the Singapore transaction in 1991, sales averaged less than $4 million annually from 1990 to 1993. Real property sales increased to $16 million in 1994 and $53 million in 1995, but a significant amount of property has yet to be sold from FBO's list of properties available for disposal. Both FBO's October 1994 list and a second list submitted to the Office of Management and Budget in 1995 had about 100 properties listed for sale. Properties on the 1994 list were valued at $250 million. One year later, FBO added high-value properties in Manila, Singapore, Paris, and Bangkok to its list, bringing the total value of properties available for sale to $474 million. About one-third of the properties on the 1995 list were estimated to sell for $1 million or more and accounted for over 90 percent of the anticipated revenue. (See app. I for the list of properties.) In addition, State holds other property that it could potentially sell that was not on these lists. These properties are worth millions of dollars and include properties that have been retained at closed posts, including Zanzibar, Tanzania, and Alexandria, Egypt; properties that are vacant, unneeded, or unsuitable for the purposes for which they were acquired, including some in Dakar, Senegal, and Rabat, Morocco; and high-value properties that are oversized or not needed in Hamilton, Bermuda; Buenos Aires, Argentina; Prague, Czech Republic; and Budapest, Hungary. In addition, several of these unsold properties continue to incur high operation and maintenance costs. For example, in 1993, the embassy in Buenos Aires reported operating costs on the above property had doubled to almost $500,000 and major maintenance costs had risen to about $1 million. (See apps. II through IV for a detailed discussion of the above properties.) State has no systematic process to identify excess properties and to dispose of them. The Foreign Affairs Manual (6 FAM 782.1) requires each post to periodically identify and report on properties that are (1) excess to post requirements, (2) not being fully utilized, or (3) uneconomical to retain. However, embassies are not required to annually certify that they complied with 6 FAM 782.1. Further, FBO officials could provide no evidence embassies submitted excess property reports pursuant to this provision. As the single real property manager for nonmilitary U.S. government property overseas, FBO has authority to dispose of properties that become surplus, underutilized, or uneconomical (6 FAM 713.1) and to determine the use of sales proceeds (1 FAM 215). In practice, FBO does not normally proceed with a sale unless the embassy agrees, and it tries to reach agreements with the embassies on the sale of property and the use of sales proceeds. According to FBO officials, property, such as that on the October 1994 list, is identified for sale by the embassies, FBO officials, State's Inspector General, and ad hoc requests to the embassies by FBO. However, embassies lack incentives to identify, report on, and sell excess or underutilized property unless they can use the proceeds for their own needs. Further, when embassies sell property, it creates additional work for them. FBO officials' contend that the totality of such actions constitutes a system for identifying real estate that should be sold. We do not believe that these actions constitute an organized system for identifying these properties. Our review showed that embassies have held unneeded property for years without an intended purpose, and in some cases, they do not know why the property was ever bought. For example, a lot in Burma, purchased in 1948 for an unknown purpose, is being used to store shipping containers. In some cases, the embassies and FBO disagree on selling identified property. We found several cases where embassies and FBO have had protracted and costly disagreements regarding the use or sale of property and use of potential sales proceeds. In Brasilia, Brazil, the embassy and FBO had a standoff for over 2-1/2 years over whether (1) to sell vacant lots, which were bought in the early 1960s, and use the proceeds to renovate a 29-unit apartment building or (2) to sell an apartment building and other property and use the proceeds to build residences on the vacant lots. The embassy emphasized that the apartment building is in an extremely poor location. Also, according to FBO officials, the lots are located in the best parts of Brasilia, and there is a stigma attached to living in apartments in Brasilia. FBO indicated that it was cheaper to renovate the apartment building than to build private residences on the vacant lots. Further, legal restrictions prohibit the embassy from constructing apartments on the vacant land. During the time of this dispute, the embassy spent $580,000 annually to lease housing while the 29 apartments remained vacant. (See app. V.) An FBO policy specifies that unresolved disputes will be submitted to the Assistant Secretary for Administration for further review and discussion with senior State management. However, disputes sometimes drag on for years. Of the cases that we reviewed, the Assistant Secretary was involved only in the Brasilia housing dispute, and then only after the dispute had been ongoing for 2-1/2 years. We believe there should be a standard procedure whereby the embassies and FBO, at least annually, formally present their positions to another authority. This would help mitigate the conflicting interests of the State organizations involved and the difficulties they have sometimes in expeditiously reaching an agreement on the sale of property and the use of proceeds. It could also help alleviate the inherent reluctance to forward matters to a higher level for decision. FBO has not developed a procedure for routinely using sales proceeds to meet prioritized worldwide requirements. As an incentive for embassies to agree to a sale, FBO normally gives embassies that sell property first consideration when determining the use of sales proceeds. These uses are usually not justified in the annual congressional budget. FBO evaluates the legitimacy and economic soundness of each proposal, but it does not routinely weigh the proposal against the needs of other embassies. We did find a few cases where FBO worked with the embassies to identify uses for the proceeds, rather than redirect the proceeds to other countries with greater need. For example, after the consulate in Lyon, France, closed in June 1992, the consul residence was sold in April 1995 for $613,000. In May 1992, the embassy in Paris requested to use the sales proceeds. Initially, FBO indicated that the proceeds should be made available for use in other countries, but the embassy objected, and FBO has been working with the embassy since 1994 to identify ways to use the proceeds in-country. For any sales proceeds that will not be used in the country where the sale occurred, FBO's policy is to use them to buy property in countries with high lease costs. According to FBO officials, they have developed a list of countries where leasehold costs are high, expected to rise, and offer optimum investment opportunities. Even though this appears to be a move in the right direction, FBO did not provide us with its plan for using proceeds to meet this objective. FBO officials maintain that they need the flexibility to use the proceeds for other purposes. In contrast to FBO's case-by-case approach to the use of sales proceeds, FBO determines critical construction and maintenance needs at posts and establishes funding priorities for the use of appropriated funds. For example, all posts are evaluated against established criteria in preparation for the 5-year budget. Furthermore, embassies' annual requests for maintenance funds for special projects are weighted and ranked against requests from all other posts, and those with the highest rankings are generally funded. FBO officials said they cannot use the same approach for sales proceeds because the sales process is uncertain and they need flexibility in using the funds. Our review showed that through fiscal year 1991, State estimated the potential sales proceeds and included them as offsets to its appropriation requests. According to FBO, it does not do this now because of the long time required for developing budget estimates, the volatile nature of overseas real estate markets, and the complexities of marketing high-value properties. Even though State has the authority to retain proceeds from real estate sales, and sales proceeds are uncertain, FBO and embassies are using proceeds for real property purposes not justified and funded through the regular appropriation process. This ad hoc process essentially creates an off-budget fund. According to FBO documents, of the $16.3 million in fiscal year 1994 sales, $6.3 million, or about 39 percent of the proceeds, were designated for use in the country where the sales occurred. About $2 million of the $6.3 million were to be used for replacement property and $4.3 million for other kinds of construction. Of the remaining 61 percent, 35 percent was made available for use in other countries, and 26 percent had no specific use designated. Although State subsequently reports to the Congress on the use of sales proceeds, the reliability of the information is questionable because proceeds are commingled with appropriated funds and expenditures from sales proceeds cannot be distinguished from other funds. Consequently, FBO attributes the use of sales proceeds to certain projects. FBO officials are considering the feasibility of separately accounting for sales proceeds to better manage and program them. The current process State uses to identify and sell unneeded real estate has not been effective, mainly because of parochial interests among various parties. As a result, State has a large inventory of excess real estate. In light of (1) the revenues that could be earned from the sales of high value property, (2) the cost to the U.S. government to maintain excess properties, and (3) the likely increase in excess properties that will result from announced post closings, we recommend that the Secretary of State establish an independent panel to make recommendations regarding the sale of excess real estate to reduce the current inventory of property. In establishing this panel, the Secretary should consider appointing representatives from the Office of the Inspector General and the Bureau of Finance and Management Policy as well as private sector representatives with overseas real estate experience. Including these representatives could help ensure that the panel's actions reflect the financial needs of the Department of State and the interests of the taxpayer. Further, to provide a routine process for expeditiously resolving disagreements between FBO and the embassies, we recommend that the Secretary require FBO and the embassies to report annually to the Under Secretary for Management on all properties identified as excess where FBO and the embassies have not agreed on whether to retain or sell such properties. As part of the process, the Secretary should require the embassies to certify annually that they have (1) reviewed their property holdings to identify properties that are excess to embassy requirements, not being fully utilized, or uneconomical to retain and (2) reported any excess property to FBO. We also recommend that the Secretary of State include estimated receipts from real estate sales in the annual congressional budget request; establish a formal process for approving and documenting the use of sales proceeds and require that their use for other than justified replacement property be weighed against critically analyzed worldwide requirements; and improve the internal financial controls to better document and account for the receipts and expenditures of sales proceeds and provide a sound basis for reporting to the Congress on the receipt and use of sales proceeds. Creating a separate account for sales proceeds should be the first step. In commenting on a draft of this report, State agreed with the thrust of the report's findings, and said it had taken action to manage its real estate holdings. However, State did not directly address our recommendations. As we noted throughout the report, State's actions to date are steps in the right direction. Despite these improvements, State still does not have an efficient system for identifying and disposing of excess real estate. State's lack of standard operating procedures to fully document the real estate review and decision-making process and account for and report on the use of funds are weaknesses that must be addressed. We believe that our recommendations will help correct these deficiencies. State indicated that it is in the process of selling some of the properties listed in appendixes II through V; however, it continues to rationalize its retention of other properties without providing evidence that it considered budget realities in doing so. We believe that the tenor of State's comments reenforce our position that an independent panel is needed to decide what real estate should be sold based on consideration of all pertinent factors. Finally, based on State's comments, we requested further information on properties in Hamilton and Bermuda. In our view, State's backup data provided additional grounds upon which to question retaining the properties. The Department of State's comments, along with our analysis, are included in their entirety in appendix VI. Because the Department of State has not indicated support for our recommendations intended to better identify and dispose of excess property, and account for sales proceeds, the Congress may wish to direct State to take action to implement them. We conducted our work primarily at the headquarters of State's FBO. We interviewed State personnel and reviewed the files relating to real estate for selected countries. We used reports by State's Inspector General as a base for selecting a number of the cases we reviewed. Complete information on all the cases we reviewed was not available at State headquarters, making it difficult to substantiate certain facts. Also, FBO officials would not give us access to some files for locations where there were ongoing considerations to sell property. We believe that these limitations have not materially affected our conclusions and recommendations, but they may have affected our ability to review other problem cases. We conducted our work from October 1994 to February 1996 in accordance with generally accepted government auditing standards. We are sending copies of this report to other interested congressional committees, the Secretary of State, and the Director of the Office of Management and Budget. We also will make copies available to others on request. Please contact me at (202) 512-4128 if you or your staff have any questions concerning this report. The major contributors to this report are listed in appendix VII. Bahuio Amb. R&R Residence (continued) State holds and maintains some properties where posts have been closed. Other properties are being marketed. Nineteen additional closures are planned for 1996 as cost-saving measures. It does not seem prudent to close posts as cost-saving measures and then continue to hold and maintain post property at government expense. In Zanzibar, the consulate was closed in 1979, but rather than selling the consul general residence, the embassy in Tanzania kept the property and has used it predominantly for recreational purposes and occasionally for official purposes. In 1987, the house was renovated at a cost of $108,000. In 1991, the State Inspector General recommended that the embassy make a recommendation to the State Department regarding the residence's disposition. According to the Inspector General, the embassy spent $20,000 in 1990 for maintenance and personnel costs and used it 137 nights for official and personal use. The Inspector General report indicated that the island of Zanzibar has several adequate hotels that could be used by travelers. It also questioned the likelihood that the United States would reopen a post in Zanzibar and therefore need such a residence. The embassy suggested in 1991 that the residence be retained for at least 3 more years in anticipation of higher property values. Meanwhile, the embassy undertook what it termed a "modest" property refurbishment to enhance the residence's value and its utility to U.S. personnel on official travel in Zanzibar. According to Office of Foreign Buildings Operations (FBO), $23,000 was allotted in 1992 to enhance the value of the property. In early 1995, the Inspector General again visited Zanzibar. According to Inspector General officials, maintenance and salaries relating to the residence were $32,000 in 1994. The residence was used 122 nights for recreation and 36 nights for representational purposes. In Alexandria, Egypt, the consulate general was closed in 1993; however, State officials retained the consulate general residence, with an estimated value of over $1 million, in hope that the post would be reopened. State officials attempted to justify its retention on economic grounds, such as using it as a residence for a U.S. Information Agency representative. The Inspector General questioned such retention as an "apparent lack of concern for the financial loss being incurred by the U.S. government." State officials then said that when the ambassador used the residence, State would save $20,000 in lodging costs and that the spacious residence is ideal for representational and trade promotion events. In Tangier, Morocco, in September 1988, State approved closing of the consulate, but State retained the consulate compound, which contained a principal officer residence and an office building. The estimated value of these facilities is greater than $2 million. Voice of America has been using some of the facilities. In 1990, the embassy raised the issue of selling the facilities, but actions to sell the property have evolved slowly. For example, in July 1992, the embassy submitted its third request to FBO for guidance. In January 1993, the embassy informed FBO that its repeated requests over the preceding 9 months for funds to cover the cost of appraisals had not been answered. It also requested $50,000 to provide custodial services for these surplus properties. An FBO official told us that both FBO and the embassy have now informally acknowledged the need to sell the facilities, and listed them on the October 1994 potential sales list, but they have not made a formal decision to do so. In September 1993, FBO requested all posts to provide information on vacant or underutilized land. In response, embassies reported a number of vacant properties. Some of these properties were acquired for purposes that never materialized and have been held for a number of years. They could be candidates for possible sale. Because the information available to us in Washington is sketchy, we cannot fully evaluate whether these properties should be sold. However, if they are retained, the reasons for their retention should be weighed against an analysis of their potential disposal value. The following property was not being used: In Shanghai, China, State owns 2.6 acres of vacant land having an estimated value of $4 million. State is trying to obtain China's concurrence on the use of this property. In Rabat, Morocco, State paid $435,000 for an 8-acre lot in 1988 for an embassy and ambassador residence. The King of Morocco has used the lot for an orange grove since its purchase. There are no current plans to build on the property. The embassy also owns a residence, acquired in 1972, that the security officer will no longer clear for occupancy. In February 1994, the Inspector General reported that State should develop a plan to dispose of its excess property in Morocco. In May 1994, the embassy reported that it had six properties that were no longer needed and should be sold, not including the 8-acre lot. In June 1995, however, the embassy indicated that it was willing to sell only two of the properties. In Colombo, Sri Lanka, State owns property, which was bought in 1984 to expand the chancery. A warehouse is now being constructed on the property. State also owned a lot acquired in 1948 for residential use, which was worth several hundred thousand dollars. This lot was sold recently to pay for the warehouse. In Dakar, Senegal, State acquired a 3-acre site in 1989 for an ambassador residence. There are no definitive plans to build the residence. In Islamabad, Pakistan, State owns a vacant lot next to the chancery, which the embassy wants to keep for future residential use, but no plans exist. In the meantime, it provides perimeter security. The following property was being used for parking and other purposes: In Seoul, Korea, State owns 3.7 acres, acquired in 1990, that is worth millions of dollars. It is currently being used for parking. State is trying to work out a property deal with the Korean government, involving this and other property. In Port of Spain, Trinidad, State owns 0.14 acres bought in 1987 for an office annex. The office annex was never built, and the embassy has used the lot for parking. In Praia, Cape Verde, State acquired a lot in 1981 to construct an ambassador residence. The residence was not built, and the lot has been used as a tennis court. State also purchased a residence in 1985 for Marine guards, but the guard detachment was never assigned to the post. The embassy was willing to sell the residence, but only if it could use the proceeds. The lot is on FBO's October 1994 sales list, but the residence is not. In Rangoon, Burma, State owns a 2.4-acre lot, purchased in 1948 for an unknown purpose. The embassy uses the lot for storing shipping containers. According to an FBO official, FBO and the embassy are considering the lot for a warehouse, but construction money has not been authorized for the project. The following property was not vacant, but was being leased to others or not fully utilized: In Dusseldorf, Germany, State owns an office building that it is not using. In fact, State is leasing it to an architectural firm. The embassy acknowledged that it is willing to sell the building, but a formal decision to sell has not been made. A State official said that the building will be sold when the lease expires in 1997. In Kinshasa, Zaire, State owns a lot that was intended for residential units. However, the embassy in Zaire has downsized and existing residential units are being sold. The lot is currently being leased to a private company for a satellite dish. There is no planned use for another 24.7 acres originally intended for a transmitter site. State has been postponing the sale of these properties pending the sale of the residential properties under better market conditions. The following property is held under long-term leases:In Doha, Qatar, State holds two long-term lease properties as future ambassador residence and embassy sites. There are no current plans to build these facilities. In Manama, Bahrain, State has two long-term lease properties that are used for parking and storage. The embassy wants to build a warehouse on one lot and continue to use the other one for parking. However, the warehouse has not qualified for funding during the screening process for use of appropriated funds. Although the embassy indicates that these lots were originally acquired for parking, they may not be optimally used if one can be given up for a warehouse. State owns several high-value properties that are unique because of their size, yet have a questionable use. These properties are retained for various reasons, such as historical or political significance or a desire for better market conditions. In Hamilton, Bermuda, State owns an expensive-to-maintain residence, known as Chelston, for the consul general. In April 1994, the post estimated that the property was worth over $12 million. An FBO survey in February 1993 disclosed that the residence needed $240,000 in major repairs. The main house is nearly 10,000 square feet and is situated on a 14-acre estate with a beach house. State's Inspector General has repeatedly recommended selling the property. In a September 1993 report, it stated that "at a time of continual budget constraints, the Department cannot afford the luxury of maintaining this ostentatious piece of property." Annual operational and maintenance costs for this one residence are over $100,000. Post officials were instrumental in getting President Bush to intervene against selling the property in 1991. According to FBO officials, the Bermuda government opposes the sale of the property. In Buenos Aires, Argentina, State has maintained a 43,000-square foot mansion as an ambassador residence since 1929. Estimates of its value vary widely and range up to $20 million. Annual operating costs are about $500,000. The issue of selling the property dates back more than 20 years. As far back as 1969, we recommended disposing of the residence and replacing it with a more appropriate house. The embassy has historically opposed selling the residence, indicating that it stands as a symbol of the U.S. presence in Argentina. Argentine officials have also opposed selling the property. After a delegation of congressional and State officials visited Argentina in December 1993, State announced that it would retain and restore the residence. In September 1995, the Inspector General reported that the ambassador has enlisted the local American business community to donate funds for gradually renovating the furnishings and interior. Further, State funding of $5 million to $6 million will be required to repair the house and equipment, and operating costs will require additional funding. According to the Inspector General, "The residence will continue to represent a major expense which the inspectors doubt can be justified indefinitely if budgets continue to shrink." In Prague, Czech Republic, State owns a 42,800-square foot ambassador residence valued at several million dollars, which it has retained for over 2 years after a decision was made to sell it, waiting for an undefined market improvement. In Budapest, Hungary, State owns a house and property, with an estimated value of over $1 million, which is used for occasional representational functions, recreational purposes, and Marine security guard housing. This property, known as the VAR, is stated to have historical significance to Hungary. Some facilities were reportedly built in 1687. In 1990, the State Inspector General reported that this facility was grossly underutilized. State officials indicated that the most logical holder of the property would be the Hungarian government because of the property's historical significance. They further indicated that a possible solution would be to trade the property for other property that the embassy now leases. A major difficulty in disposing of overseas properties is the frequent disagreements between the embassies and FBO over whether to sell properties and how to use the proceeds. These disagreements have been protracted and costly. In Brasilia, Brazil, the embassy and FBO had a standoff for over 2-1/2 years over whether (1) to sell vacant lots, which were bought in the early 1960s, and use the proceeds to renovate a 29-unit apartment building or (2) to sell an apartment building and other property and use the proceeds to build residences on the vacant lots. The embassy emphasized that the apartment building is in an extremely poor location. Also, according to FBO officials, the lots are located in the best parts of Brasilia, and there is a stigma attached to living in apartments in Brasilia. FBO indicated that it was cheaper to renovate the apartment building than to build private residences on the vacant lots. Further, legal restrictions prohibit the embassy from building apartments on the vacant land. During the time of this dispute, the embassy spent $580,000 annually to lease housing while the 29 apartments remained vacant. In Calcutta, India, an FBO study recommended in 1991 that the embassy sell a 9-unit apartment building. However, the embassy wanted to sell a 6-unit apartment building rather than the 9-unit building. The 9-unit building was worth several million dollars more than the 6-unit building. According to FBO information, both buildings were underutilized and could have been sold except that the limited post staff did not want to handle the sale of both units at the same time. In 1993, when FBO agreed to the sale of the 6-unit building, only two residents occupied the 9-unit building. The 9-unit building was recently sold for $7.7 million. By selling the less valuable property first FBO did not have the use of several million dollars for over 2 years. In 1990, the Inspector General reported that State should review the need for all State-owned property in Budapest and dispose of sites that were not needed. FBO did an asset management study and recommended selling four vacant properties. These unused properties are additional to the underutilized VAR property discussed in appendix IV. FBO and the embassy could not agree on which properties would be sold or how the prospective sales proceeds would be used. As of May 1995, only one property was being marketed. The embassy indicated that it was willing to sell two other vacant properties but not until the one currently being marketed was sold. An FBO official indicated that the embassy was unwilling to sell all the properties before it had agreement from FBO that it could use the proceeds. The fourth property is a site that was purchased in 1989 for $1.1 million for construction of a new office building. There are no plans to construct the office building, but FBO and the embassy cannot agree upon the sale of the site because the embassy wants to build residences on the site. In Kathmandu, Nepal, the embassy has retained excess property, estimated to be worth several million dollars, for over 5 years after the Inspector General recommended that the embassy develop a long-term plan to consolidate embassy activities and sell excess property. It took years for the embassy and FBO to reach agreement on consolidating embassy activities and selling the excess property. A decision, in principle, to sell the property was made in May 1995. In Stockholm, Sweden, over 6 years elapsed between the embassy's request to sell two apartments valued about $175,000 and the decision to sell the property. During this period the embassy and FBO could not agree on how the proceeds would be used. The following are GAO's comments on the Department of State's letter dated January 26, 1996. 1. We recognized State's actions to improve the management of its real estate function in previous reviews. This progress was the key reason for the removal of property and maintenance management from both GAO's and the Office of Management and Budget's high risk lists. At the same time, we noted that State needed to take further action.2. State did not provide evidence during our review that it had established a vigorous program to identify excess and underutilized properties throughout the world for possible sale. As indicated in the report, State's actions consisted of unrelated and uncoordinated actions by the embassies, FBO officials, State's Inspector General, and ad hoc requests to the embassies by FBO. Consequently, embassies have held unneeded property for years without an intended purpose. 3. State does not routinely weigh proposed uses of sales proceeds at an embassy against the needs of other embassies, such as it does for certain uses of its appropriated funds. State also did not provide for our review full information on its ranking of posts for reducing leasehold costs because, as indicated in the report, State officials maintain that they need the flexibility to use sales proceeds for other purposes. 4. State's consensus mode of operation and the asserted effects on diplomatic relations of selling real estate, in our view, are at the heart of State's difficulties in selling excess or underutilized real estate. That is why we believe that an independent view should be brought to bear on these difficult decisions to ensure that all pertinent factors are objectively weighed. In the cases that we reviewed, it was not evident that disagreements between the Department officials and the embassies were timely referred to higher management levels and decisions expeditiously made. 5. We noted the uncertainties in offsetting anticipated real estate proceeds against State's budget request. However, State essentially treats sales proceeds as an off-budget fund that it uses for items additional to those in the budget. For example, under the current procedures, State would use the $53 million in fiscal year 1995 sales proceeds for real estate matters not justified in the budget. 6. We requested additional information from State on the Hamilton property to substantiate its assertion that it was a gift from the Bermuda government and that the Bermudian government was opposed to the sale. The information provided indicated that the property was originally owned by a U.S. citizen. Upon his death, the trustees passed ownership of the property to the Internal Revenue Service in payment of back taxes and State, through discussions with the Bermudian government, acquired the property. State was unable to provide documentation from the Bermudian government opposing the sale. State, however, provided a September 1994 embassy cable generated after a luncheon meeting with Bermuda's Premier where he expressed opposition to the sale. The cable goes on to say that with the Premier's approval, the property could be sold only to a Bermudian, but would likely generate less than its current value. The fact remains that sale of the property would allow State to reallocate millions of dollars in sales proceeds, and eliminate the annual maintenance cost of $100,000, as well as the costs of major repairs. 7. The decision to retain the property in Buenos Aires dates back to 1993. Given the high value of the property, and today's environment of downsizing and fiscal restraint, it would be worth revisiting. 8. The files contained no information on what it cost to maintain the property in Budapest. State should strongly consider giving this historical property to the Hungarian government. 9. State commented that the property in Zanzibar could be sold were it not for the political considerations. The independent panel we recommended would weigh the political factors against the current cost of renovating and maintaining this recreational property. 10. State did not provide documentation supporting the frequency of the ambassador's visits to Alexandria. According to the documentation provided, the house, occupied by a representative of the U.S. Information Agency, was used to host 14 mostly academic and cultural events in 1995. The July 4th party was the only event listed as given by the ambassador. The other events listed did not specifically state whether or not the ambassador was in attendance. 11. We deleted the Stuttgart example based on State's comments. Jess Ford Diana Glod Roy Hutchens Frederick Barrett Edward Kennedy Olivia Parker 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 reviewed the Department of State's excess or underused overseas real estate, focusing on: (1) property that potentially could be sold to provide funds for other real estate needs; (2) State's problems in determining which properties to sell; and (3) how State uses proceeds from real estate sales. GAO found that: (1) from 1990 to 1995, State sold $133 million in real estate, which was a small part of its total excess or underused property; (2) State does not have a standard process for identifying and selling excess or underused real estate; (3) in practice, excess or underused property is not identified or sold without the assistance of an embassy; (4) the use of the funds from property sales is the only incentive that the embassies have to identify and sell excess or underused real estate; (5) State does not ensure that the profits from the sale of property go to its most urgent real estate needs worldwide; and (6) the proceeds from the sale of property are generally allowed to be used by the corresponding embassy.
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The United States maintains more than 250 diplomatic posts, including embassies, consulates, and other diplomatic offices, located around the world. More than 60,000 personnel--U.S. and foreign service nationals-- work at these locations. About 50 government agencies and subagencies operate overseas, including the Departments of State, Defense, and Justice; and the U.S. Agency for International Development. Since the 1970s, U.S. diplomatic personnel overseas have been increasingly at risk from terrorist attacks and other acts of violence. In response, the State Department in 1986 began a substantial embassy construction program, known as the Inman program, to protect U.S. personnel and facilities. In 1991, we reported that State was unable to complete as many projects as originally planned due to systemic weaknesses in program management, as well as subsequent funding limitations. This construction program suffered from delays and cost increases due to, among other things, poor program planning, difficulties in acquiring sites, changes in security requirements, and inadequate contractor performance. Following the demise of the Inman program in the early 1990s, the State Department initiated very few new construction projects until the Africa embassy bombings in August 1998 prompted additional funding. In the 1998 bombings, terrorists attacked the U.S. embassies in Nairobi, Kenya, and Dar es Salaam, Tanzania. These large-scale truck bombings killed more than 220 people, including 12 American U.S. government employees and family members, 32 Kenyan national U.S. government employees, and 8 Tanzanian national U.S. government employees. In addition, the bombings injured more than 4,000 Kenyans, Tanzanians, and Americans. Figures 1 and 2 show pictures of the embassy in Tanzania before and after the bombings. Since these embassy bombings, U.S. facilities and personnel have faced continued threats from terrorist and other attacks. Embassy and consulate employees are on the front lines, often serving in dangerous locations, and must rely heavily on the protection provided by the law enforcement and security measures of the foreign country in which they are located. From 1998 through 2002, there were 30 terrorist attacks against overseas posts, personnel, and diplomatic residences. During that same period, overseas posts were forced to evacuate personnel or suspend operations 83 times in response to direct threats or unstable security situations in the host country. (See table 1.) During the first 2 months of 2003, overseas posts authorized the departures of personnel and/or their families a total of 11 times due to security concerns. Before I discuss the results of our work, I want to explain some of State's security standards and why they are important. State identified five key security standards for overseas diplomatic office facilities to protect them against terrorism and other dangers. First, State believes that office facilities should be at least 100 feet from uncontrolled areas, such as a street where vehicles can pass without first being checked by security officials. Therefore, this distance helps to protect the buildings and occupants against bomb blasts, mob attacks, and other threats. In establishing the setback standard, the State Department determined that at 100 feet, the effects of a bomb blast have diminished to the point where the cost of site acquisition and construction to protect against the remaining blast effects are relatively affordable. State notes that additional setback may not be practical at many locations. Exhibit 1 is a video clip from the State Department showing a test blast from 100 feet away. The second and third standards are strong perimeter walls and anti-ram barriers to ensure that vehicles cannot breach the facility perimeter to get close to the building prior to detonating a bomb. Exhibits 2 and 3 are video clips from the State Department showing the effectiveness of these walls and barriers. The fourth standard requires blast-resistant construction techniques and materials. Among other things, these materials include reinforced concrete and steel construction and blast-resistant windows. Diplomatic Security officials state that flying glass is a primary cause of injuries and deaths in a blast. Coupled with a 100-foot setback, blast-resistant construction provides the best possible protection against a vehicle bomb attack, according to Diplomatic Security officials. Combined, these four standards mitigate the effect of a vehicle bomb attack and prevent the building from suffering catastrophic collapse and complete destruction. State's fifth security standard is controlled access at the perimeter to the compound. At this control access point, guards can screen personnel and visitors before they enter the embassy compound to verify that they have no weapons and that they should be allowed to enter, and can fully search vehicles before they are permitted to enter the compound. Over the last 4 years, State has accomplished much in improving posts' security through various security upgrades. These upgrades include the installation of Mylar shatter-resistant window film and forced entry/ballistic-resistant doors; the construction of perimeter security walls and fences, jersey barriers, and compound access controls; and the stationing of additional police and security guards. In June 2002, a bomb attack against the U.S. consulate in Karachi demonstrated the effectiveness of recent security upgrades to the compound. As shown in figure 3, physical damage to the building was minimized by these upgrades. As of September 30, 2002, State had completed security upgrades at 113 posts and had installed Mylar window film barriers and forced entry/ballistic-resistant doors at 242 posts. Further, to address security concerns at some of the buildings without a 100-foot setback, State has secured host government cooperation in either closing adjacent streets and/or posting local police officers as guards to monitor and control surrounding streets. State has also acquired adjacent land at 34 posts to increase setback since the 1998 embassy bombings. For example, State purchased a gas station next to an office annex building in Athens, Greece, and closed the gas station, thus increasing setback and improving security. At all four posts we visited, we observed that recent security upgrades have enhanced security. At three of these posts, local authorities have permitted closing off streets to public traffic in order to protect U.S. facilities. However, Diplomatic Security officials acknowledged that it is not feasible to increase setback by acquiring land and closing off nearby streets at many locations. Furthermore, these officials also told us that security upgrades were partial fixes that did not bring the buildings up to physical security standards. As a result, many buildings and their occupants remain vulnerable to terrorist attacks. Exhibit 4 is a video clip from the State Department that illustrates this vulnerability. It shows the effect of a blast 100 feet away on an office that does not meet the standard for blast-resistant construction. The windows have been treated with Mylar sheeting, a standard upgrade that mitigates the effects of glass shattering in a blast. Although Mylar provides some protection, the non- blast-resistant window construction may allow glass to be forced into the building at a high rate of speed. To assess the security of embassy and consulate facilities, we analyzed State Department data to determine if the primary facilities meet State's five key standards that I discussed earlier. Figure 4 shows the portion of posts where the primary office building meets or does not meet four of the five security standards: setback, perimeter wall or fence, anti-ram barrier, and compound access control. At the request of Diplomatic Security officials, we will not discuss details on the remaining standard, blast- resistant construction, due to its sensitivity. We can say, however, that facilities completed since the late 1980s are considered to be blast resistant. Figure 5 shows the number of primary facilities that meet one, two, three, four, or five of the physical security standards. For example, it shows that the primary office facility at 81 posts met none of the five standards. Of these, 36 facilities are in locations that the State Department has designated as posing a high or critical threat level. As shown in figure 4, only 28, or 11 percent, of the primary buildings meet the 100-foot setback standard. More than half of the primary buildings have less than 15 feet of setback--these buildings are virtually perched on the street. Figure 6 is an example of a post with limited setback. At the four posts we visited, all of the primary office buildings have limited setback from the street and several annex buildings have no setback. As shown in figure 7, one of these buildings is adjacent to a public gas station, which could exacerbate the effects of a bomb attack. Another building, with little setback, is located next to a main thoroughfare. Consequently, public traffic, including trucks and buses, routinely travels within feet of U.S. government office space. At three of the four posts we visited, the embassy had secured host government cooperation in closing at least one street surrounding the primary office building; however, embassy officials at one location noted that these agreements were temporary and could be revoked at any time. Moreover, the embassies had not been able to close streets running next to all of their facilities, such as office annexes. For example, figure 8 depicts the view from a senior official's office in an annex building where post officials were unable to close the main thoroughfare that runs directly in front of the building. Perimeter walls or fences and anti-ram barriers are two standards that work together to protect facilities. We found that 120 primary facilities lack an adequate perimeter wall/fence, while 147 lack adequate anti-ram barriers. Diplomatic Security officials explained that in many cases, posts are unable to install these upgrades due to host country limitations, such as their impact on traffic flow, parking, and the operation of adjoining residences and commercial buildings. Diplomatic Security officials stated that perimeter upgrades have been installed at all posts that are able to accommodate them. We also found that 108 posts either lack or have inadequate compound access control, a system of gates, barriers, and guard booths that is used to pre-screen personnel and vehicles before entering the embassy grounds. At one embassy we visited, visa applicants could gain access to the embassy building prior to undergoing proper screening, which would be a serious concern in the case of a terrorist action. Figure 9 depicts an inadequate compound access control booth, which is located within the embassy compound. The Security Officer acknowledged that this was a serious weakness and that visitors were not screened adequately before entering the embassy building. Construction of a new compound access control system is scheduled to begin in May 2003. Figure 10 depicts a newly upgraded compound access control system that facilitates full screening of all vehicles and persons prior to their gaining access to the compound. Ambassadors and security officers at three of the four posts we visited emphasized that in addition to facilities not meeting standards, there were security difficulties associated with the number of office facilities at their post that were spread out around the city. Three of the four posts we visited had more than five locations, and post managers were concerned that this made it extraordinarily difficult and expensive to implement security measures. Officials also stated that dispersion of facilities complicates emergency action planning. We note that frequent travel between dispersed facilities may also pose security risks to personnel because terrorists and criminals can target them while they are in transit. In the construction of new embassy compounds, all U.S. government offices are required to be located on the compound. State Department data show that many buildings are in poor condition. At 133 posts, the primary office building has certain fire/life safety deficiencies. At one post we visited, the fire escape for the 6th floor of the chancery was a chain-link ladder strapped to a heating radiator (fig. 11). OBO fire officials explained that a number of posts were unable to meet fire standards, such as sprinkler systems and proper number of exits, due to the structural limitations of the building. This underscores the Department's position that many buildings are in a condition that will not allow a security and safety upgrade. Another safety problem is the seismic condition of buildings. Although the State Department does not have data on seismic conditions at all facilities, it acknowledges that embassy and consular employees at some locations may be working in buildings that do not protect against earthquakes. At one of the posts we visited, located in an earthquake region, the consular building has a very poor seismic rating. The State Department has been unable to locate a suitable temporary facility that can house the consular services while the landlord makes seismic improvements to the current building. The landlord has absolved himself from any responsibility in the event of earthquake damage. Maintenance is a serious concern because "essential maintenance and repair requirements have long been unfunded," according to OBO documents. In May 2002, State estimated that its repair backlog to be about $736 million. For the primary office buildings alone, maintenance needs exceed $316 million, with the primary building at more than one- third of all posts having more than $1 million in maintenance requirements. OBO projects that maintenance costs will increase over time because many of the facilities are so old and antiquated, some dating back to the late 19th and early 20th century. Our visits to four posts provided numerous examples of maintenance problems. All of the posts we visited had buildings with serious maintenance concerns that are common to old and deteriorating buildings, such as sinking foundations, crumbling walls, bursting pipes, and electrical overloads. Although there are no specific criteria to measure the adequacy of office space, OBO has provided posts a questionnaire to help them evaluate space needs. Based on post inputs, OBO's Long-range Overseas Buildings Plan describes space conditions at posts where it plans a new facility or major rehabilitation. We counted 96 posts mentioned in the plan where OBO described the office space as being crowded or poorly configured. During our post visits, we verified that crowded and poorly configured office space is a problem. This was particularly true in the controlled access areas of the embassies where classified information is stored and processed. Because of the special requirements of these areas, it is generally not feasible to lease additional space as the embassies have done to expand office space for unclassified work. One post had severe overcrowding in its chancery. To cope, the post resorted to creating workspaces under a stairway and in storage areas. One office stacked a printer on top of shelving that can only be accessed with a stepladder in order to make room for another small workstation. This post used trailers located behind the chancery to augment office space. In addition, all of the posts expressed concern that the crowded conditions would get worse because they anticipate staff increases to handle additional responsibilities, such as performing more rigorous screening of visa applicants. Several ambassadors told us that the dispersion of office space in multiple buildings hindered operational efficiency. This is because personnel spend significant amounts of time going from one facility to another to conduct daily business. I will now briefly discuss information technology capabilities at overseas posts, which, along with office facilities, are an important part of diplomatic readiness. State has long been plagued by poor information technology capabilities. In 1999, the Overseas Presence Advisory Panel reported that many posts are equipped with obsolete systems that prevent effective interagency information sharing. The Secretary of State has made a major commitment to modernizing information technology. According to State officials, the department invested $236 million in fiscal year 2002 on key modernization initiatives for overseas posts and plans to spend $262 million over fiscal years 2003 and 2004. State reports that its information technology is in the best shape it has ever been, and embassy personnel at the four posts we visited agreed, noting that they now have improved Internet access and upgraded computer equipment. State is now working to replace its antiquated cable system with the State Messaging and Archive Retrieval Toolset (SMART), a new integrated messaging and retrieval system. We have raised a number of concerns regarding State's management of information technology programs, and believe that State's information technology modernization efforts warrant management attention and oversight to ensure that State is following effective management practices. In 2001, we reported that State was not following proven system acquisition and investment practices in attempting to deploy a common overseas knowledge management system. State canceled this initiative because it could not get buy-in from other foreign affairs agencies. In 2001, we reported on State's information security problems, including weaknesses in access control that place information resources at risk of unauthorized access. As State continues to modernize information technology at overseas posts, it is important that it employs rigorous and disciplined management processes on each of its projects and that it addresses its information security weaknesses. This is particularly important on the SMART system, which State acknowledges is an ambitious effort. The Office of Management and Budget recently reduced funding for the system because of concerns that State was not employing effective management processes. State continues to make security upgrades at some posts, but it is shifting its resources toward replacing existing facilities with new, secure embassy compounds or substantially retrofitting existing, newly acquired, or leased buildings. As shown in figure 12, funding for State's capital projects has increased from $9.5 million in fiscal year 1998 to a requested $890 million in fiscal year 2004. State is still in the early phase of this multiyear, multibillion-dollar construction program. I will discuss this program briefly and then make several preliminary observations regarding State's management of this program. Following the 1998 east Africa bombings, State identified about 185 posts needing replacement facilities in order to meet security standards. As of February 10, 2003, State had begun to replace 25 of these posts with new or retrofitted embassy and consulate compounds. From fiscal year 1999 through fiscal year 2003, State has received approximately $2.7 billion for its new construction program. OBO officials estimated that beginning in fiscal year 2004, it will cost an additional $16 billion to replace facilities at the remaining 160 posts. OBO plans to construct these replacement facilities on embassy/consulate compounds that will contain the main office building, all support buildings, and, where necessary, a building for the U.S. Agency for International Development. To help manage this large-scale construction program, OBO developed the Long-range Overseas Buildings Plan, first published in July 2001 and most recently updated in April 2002. The latest version of the plan outlines and prioritizes proposed capital projects over 6 years, from fiscal year 2002 through fiscal year 2007, based on input from State's Bureau of Diplomatic Security, regional bureaus, and agencies with overseas presence. According to the April 2002 plan, State plans to fund the replacement of facilities at 81 posts at an estimated cost of $7.9 billion from fiscal year 2002 through fiscal year 2007. As shown in figure 13, the majority of these projects are planned for Africa and Europe. OBO plans to release the next update of the Long-range Overseas Buildings Plan by the end of March 2003. Of State's 25 post replacement projects funded after the 1998 embassy bombings, State has completed the construction of 2 new embassy compounds and major retrofits of 2 newly acquired buildings that will serve as embassies. The remaining 21 projects are currently in the construction process. These consist of 18 new embassy and consulate compounds, 1 consulate compound renovation, and 2 newly acquired buildings undergoing major retrofitting for use as embassies (see fig. 14). State plans to initiate another 7 post replacement projects in fiscal year 2003 and 8 post replacement projects in fiscal year 2004. These projects will be completed in fiscal years 2005 and 2006, respectively, if they adhere to State's planned 2-year construction schedule. Regarding the four posts we visited, a replacement facility is under construction at one post and fiscal year 2006 funding is scheduled for replacement facilities at two posts. The replacement facility for the fourth post is not currently scheduled; however, post officials told us that a replacement facility at their location would be included in OBO's March 2003 update of the Long-range Overseas Buildings Plan. Assuming that funding were made available to replace facilities for the three posts in fiscal year 2006, construction would not be completed until about 2009. Ambassadors at two of these posts expressed concern that it would be difficult to wait that long for a solution to their facility needs and that interim measures were needed. We are currently reviewing State's capacity and performance in implementing its large-scale construction program. Two important questions for program oversight by this and other committees are: (1) Is the construction of embassies and consulates proceeding on time and on budget? (2) Do OBO and its contractors have the capacity to properly manage the program and ensure that funds are used wisely? State is in the early stages of its expanded construction program and, therefore, has not yet established a clear track record that would provide complete answers to these questions. However, we do have several observations based on our ongoing work. First, OBO has made a number of positive changes in its management of capital projects as the construction program has expanded over the past few years. As mentioned earlier, OBO developed the Long-range Overseas Buildings Plan in July 2001, an action we had previously recommended. This plan represents a major improvement in the management of embassy construction because it provides decision makers with an overall sense of proposed project scope and funding needs, and sets performance targets that can be compared with actual performance. Further, in February 2002, OBO leadership convened the Industry Advisory Panel. The panel consists of volunteer industry representatives who meet quarterly to discuss issues related to OBO's construction program and advise OBO management on industry's best practices. Moreover, senior OBO management has increased its oversight of ongoing capital and other projects. For example, each month, the OBO Director holds a 2-day Project Performance Review meeting to review the progress and problems of all ongoing OBO projects in detail. In addition, OBO is requiring contract administration training for all senior field staff who are to supervise new embassy and consulate construction. Second, State is taking steps to accelerate the construction process, reduce construction costs, and further enhance physical security conditions of new buildings. For example, OBO has developed a standard embassy design for use in most projects and has moved away from a "design-bid-build" method of contracting toward a "design-build" method. Use of a standard design and design-build contracting has the potential to reduce project costs and the time taken to implement projects. Table 2 provides details of the three standard designs that OBO has developed for small, medium, and large posts. OBO has set a goal of a 2-year design and construction period for its standard embassy design buildings, which, if met, would reduce the amount of time spent in design and construction by almost a year. In addition, OBO and the Bureau of Diplomatic Security are actively seeking to incorporate advanced technologies into the construction program. Exhibit 5, a video clip from the State Department showing the performance of new windows and building materials, indicates that these technologies show promise of providing an even greater level of physical security for personnel operating in new buildings. While OBO has taken positive steps, we do have concerns regarding requirements for staffing levels at locations where OBO is planning to build a new embassy compound. We believe that improvements are needed in how the State Department and other agencies project staffing requirements for new embassies. In April 2003, we will report to the Chairman of the House Government Reform Committee's Subcommittee on National Security, Emerging Threats, and International Relations that staffing projections for new embassy compounds are developed without a systematic approach or comprehensive assessments of the number and types of staff who would be needed in the future. Without adhering to a systematic process for developing future staffing needs at U.S. embassies and consulates, the U.S. government risks building the wrong-sized facilities, which could lead to security concerns, additional costs, and other work inefficiencies. State's timeline for completing the replacement of all 160 remaining posts will depend on the amount of funding it receives for the construction program. For fiscal year 2004, State's Long-range Overseas Buildings Plan called for almost $2 billion to fund the design and/or construction of 19 capital projects; in contrast, the President's proposed fiscal year 2004 budget requested $890 million for 8 new diplomatic posts. As shown in figure 15, at the proposed fiscal year 2004 rate of replacement, it would take about 20 years to fund and 22 years to complete construction of the estimated 160 remaining posts (assuming a 2-year design and construction period). Figure 15 also shows that this timeline would be shortened if State receives more funds annually. According to an OBO projection, the program to replace the remaining 160 posts could be completed in 12 years if OBO receives $1.4 billion annually for new capital projects.
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The 1998 terrorist bombings of the U.S. embassies in Kenya and Tanzania, which killed more than 220 people and injured 4,000, highlighted the compelling need for safe and secure overseas facilities. In November 1999, an independent advisory group, the Overseas Presence Advisory Panel, said that thousands of Americans representing our nation abroad faced an unacceptable level of risk from terrorist attacks and other threats. The panel called for accelerating the process of addressing security risks to provide overseas staff with the safest working environment, consistent with the nation's resources and the demands of their missions. Moreover, the panel concluded that many U.S. overseas facilities were insecure, decrepit, deteriorating, overcrowded, and "shockingly shabby," and it recommended major capital improvements to redress these problems. GAO was asked to (1) assess the current conditions of overseas diplomatic facilities, including security, maintenance, office space, and information technology; and (2) provide some preliminary observations regarding State's efforts to improve facility conditions by replacing existing buildings with new, secure embassy compounds. The State Department has done much over the last 4 years to improve physical security at overseas posts. For example, State has constructed perimeter walls, anti-ram barriers, and access controls at many facilities. However, even with these improvements, most office facilities do not meet security standards. As of December 2002, the primary office building at 232 posts lacked desired security because it did not meet one or more of State's five key current security standards of (1) 100-foot setback between office facilities and uncontrolled areas; (2) perimeter walls and/or fencing; (3) anti-ram barriers; (4) blast-resistant construction techniques and materials; and (5) controlled access at the perimeter of the compound. Only 12 posts have a primary building that meets all five standards. As a result, thousands of U.S. government and foreign national employees may be vulnerable to terrorist attacks. Moreover, many of the primary office buildings at embassies and consulates are in poor condition. In fact, the primary office building at more than half of the posts does not meet certain fire/life safety standards. State estimates that there is a backlog of about $730 million in maintenance at overseas facilities; officials stated that maintenance costs would increase over time because of the age of many buildings. At least 96 posts have reported serious overcrowding. While State continues to fund some security upgrades at embassies and consulates, State is shifting its resources from these upgrades toward constructing new buildings and substantially retrofitting existing, newly acquired, or leased buildings. Funding for these capital projects has increased from $9.5 million in fiscal year 1998 to a requested $890 million in fiscal year 2004. In addition to completing ongoing construction projects, State believes it needs to replace facilities at about 160 posts at an estimated cost of $16 billion. At the proposed fiscal year 2004 rate of funding, it will take more than 20 years to fully fund and build replacement facilities. While GAO has not fully analyzed State's performance in the early stages of this large-scale building program, GAO has observed that State has taken a number of positive steps to improve its program management. Because of the high costs and importance of this program, GAO believes the program merits extensive oversight.
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HUD is the principal federal agency responsible for programs dealing with housing and community development and fair housing opportunities. Its missions reflect a broad range of statutory mandates, ranging from making housing affordable by insuring loans for multifamily projects and providing assistance on behalf of about 4.5 million lower-income tenants, to helping revitalize over 4,000 communities 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 conventional loans. The diversity of HUD's missions has resulted in a department that is intricately woven into the financial and social framework of the nation and that interacts with a diverse number of constituencies. For example, thousands of public housing authorities (PHA) and many more private housing owners are key players in administering HUD's public housing and Section 8 rental housing programs and depend on subsidies from the Department to operate. HUD's programs also operate through other governmental entities, such as state housing finance agencies, nonprofit groups, and state and local governments. In carrying out its missions, HUD is responsible for a significant amount of tax dollars: The discretionary budget outlays for HUD's programs were estimated to be close to $31.8 billion in fiscal year 1995, over three-quarters of which was for public and assisted housing programs. In addition, HUD is currently one of the nation's largest financial institutions, with significant commitments, obligations, and exposure: It has management responsibility and potential liability for more than $400 billion of mortgage insurance, an additional $485 billion in outstanding securities, and over $200 billion in prior years' budget authority for which it has future financial commitments. In February 1995, we reported that HUD's top management had begun to focus attention on overhauling the Department's operations to correct its long-standing management deficiencies--an ineffective organizational structure, an insufficient mix of staff with the proper skills, weak internal controls, and inadequate information and financial management systems.The agency had formulated a new management approach and philosophy that included balancing risks with results, had begun implementing a substantial reorganization of field offices, and had initiated a number of other actions that would address the four management deficiencies. Over the past year, HUD has continued many of these efforts, but problems remain. For example, in September 1995, HUD completed its field reorganization, which eliminated 10 regional offices and transferred direct authority for staff and resources to the Assistant Secretaries. In January 1996, HUD announced additional efforts to empower the field office personnel and continue the Secretary's efforts to implement the "community first" philosophy by streamlining headquarters and reducing headquarters' staffing by 40 percent over 2 years. Many of the headquarters staff will be transferred to the field to enhance the agency's efforts to be more responsive to local communities. According to the HUD Inspector General's (IG) most recent semiannual report, while field staff endorsed the elimination of the regional management layer, they reported that communication and cooperation among the program offices had suffered badly and that the promised empowerment of field staff had not materialized. In the area of internal controls, the Department's new management control program was fully implemented over the past year, according to HUD officials. This program is intended to tie planning with risk-abatement strategies. Under the program, managers, as they develop annual management plans, are to identify and prioritize the major risks in each of their programs and then describe how these risks will be abated. According to HUD officials, all of the program offices' fiscal year 1996 annual management plans contained management control elements, including risk-abatement strategies. Despite improvements, internal controls continue to be a problem. On June 30, 1995, outside auditors issued a disclaimer of opinion on HUD's fiscal year 1994 consolidated financial statements because weaknesses in internal control and "nonconformances" in systems remained uncorrected.HUD's most serious internal control weaknesses pertain to its approximately $13 billion grant and subsidy payments to public and Indian housing authorities, including $9.5 billion of its operating subsidies and Section 8 rental assistance. The auditors noted that the existing internal controls and financial systems do not provide adequate assurance that the amounts paid under these programs are valid and correctly calculated, considering tenants' income and contract rents. As a result, HUD lacks sufficient information to ensure that federally subsidized housing units are occupied by needy lower-income families and that those living in such units are paying the correct rents. In 1995, the Department continued to make progress toward its goals of integrating financial systems, but much remains to be done. During the year, HUD implemented its new administrative accounting system and integrated the system for Public, Indian, and Section 8 housing. In addition, all of the program offices have completed Information Strategy Plans, which identify business and information needs. Despite these efforts, as of September 1995, HUD had 88 systems in operation or under development, 60 of which are generally not in compliance with the provisions of Office of Management and Budget (OMB) Circular A-127.HUD's financial systems continue to be identified as high-risk by OMB. The Department deserves credit for its continued emphasis on addressing its long-standing management deficiencies, including a fundamental restructuring of the agency. However, departmental restructuring is still far from being accomplished. HUD's challenge will be to continue to sustain its focus and commitment to addressing the agency's long-standing deficiencies while at the same time downsizing the agency, devolving authority to field offices, and providing greater program flexibility to communities. As HUD and the Congress continue to look at ways to reform the Department, they will face the challenge of finding the proper balance between local flexibility and authority and proper accountability for federal funds. Furthermore, until the Department completes its goal of integrating financial management systems, which remains years away, the lack of good information will plague the Department in many areas and limit its capacity to adequately monitor funds. Substantially restructuring programs and providing greater local flexibility to communities will in all likelihood also require new systems. While HUD has formulated approaches and initiated actions to address its department-wide deficiencies, these plans are far from reaching fruition and problems continue. In addition, we believe that until the agency and the Congress are successful in working through the proposals for a major restructuring of the agency, which include consolidating hundreds of program activities, HUD has only a limited capacity to eliminate the Department-wide deficiencies that led us to designate it as high-risk. Accordingly, we believe that both now and for the foreseeable future, the agency's programs will be high-risk in terms of their vulnerability to waste, fraud, and abuse. As of September 30, 1995, FHA's portfolio of insured multifamily loans consisted of 15,785 mortgages with unpaid principal balances of $47.7 billion. About $38.5 billion of the insurance supports more than 14,000 multifamily apartment properties. The remainder of the insurance supports hospitals ($4.9 billion) and nursing homes ($4.3 billion). In addition to mortgage insurance, most of the FHA-insured properties receive some form of direct assistance or subsidy, such as below-market interest rates or Section 8 project-based rental assistance. HUD also provides Section 8 project-based assistance for properties that are not insured by FHA. According to HUD's data, the Department has 6,391 Section 8 contracts with projects not insured by FHA containing about 375,000 units receiving project-based assistance. The fundamental problems that HUD faces in overseeing the multifamily housing portfolio, which we discussed before this Subcommittee last year, continue. Specifically, for a large proportion of this housing, the government is paying more to house lower-income families than what is needed to provide them decent, affordable housing. The insured multifamily properties also expose the federal government to substantial current and future financial liabilities from default claims. A 1993 study of multifamily rental properties with HUD-insured or HUD-held mortgages found that almost one-fourth of the properties reviewed were "distressed." Properties were considered distressed if they failed to provide sound housing and lacked the resources to correct deficiencies or if they were likely to fail financially. The reasons for these problems are varied, including design flaws in programs; the Department's dual role as assistance provider and insurer; and long-standing deficiencies in staffing, data systems, and management controls. Program design flaws have resulted in HUD's subsidizing rents at many properties that are far above market rents. In particular, this problem occurs under HUD's Section 8 new construction and substantial rehabilitation programs, in which the Department paid for the initial costs of development by establishing rents above the market levels and continued to raise the rents regularly. HUD's dual role as assistance provider and insurer has contributed to inadequate enforcement of the Department's standards for the condition of properties and decisions by the agency to increase subsidies in order to avoid claims stemming from loan defaults. In addition, as noted in our June 1995 report on default prevention, inadequate management has resulted in poor living conditions for families with low incomes in a number of insured multifamily properties and contributed to a large number of past and anticipated defaults on FHA-insured loans. During this past year, HUD has attempted to address these problems through a legislative proposal known as "mark to market." The proposal was applicable to about 8,500 properties that both have FHA insurance and receive Section 8 project-based assistance. According to HUD's data, project-based assistance is provided for approximately 700,000 of the 855,000 apartment units covered. The proposal was aimed at ending the interdependence of subsidies and insurance claims, eliminating the excess Section 8 subsidy costs, and improving the physical condition of properties in poor condition--generally older properties with low rents. Under the mark-to-market proposal, Section 8 project-based assistance was to be eliminated or phased out for insured properties as the contracts expire. The proposal applied whether or not the subsidized rents were above the market levels. Residents living in units that receive project-based assistance were then to receive tenant-based assistance. Owners would set the rents at market levels, which in many cases would reduce the rental income and lead to defaults on the FHA-insured mortgages. To address this, HUD proposed reducing the projects' mortgages if such action was needed for the properties to be able to compete in the commercial marketplace without project-based assistance. HUD's goal was to replace the FHA-insured loans with ones not insured by FHA. Hearings were held on HUD's mark-to-market proposal last year, but neither the House nor the Senate acted on the proposal. In the President's fiscal year 1997 budget, HUD announced several planned revisions to its mark-to-market proposal. Most notably, the Department has indicated that the proposal will initially focus on a smaller segment of the multifamily housing portfolio--those properties with expiring contracts whose current rents are above the market levels. In addition, HUD states that localities will decide whether the housing subsidies should be tenant-based or project-based. The extent to which this proposal will reduce project-based assistance in favor of tenant-based is not clear. During this past year, HUD has also been undertaking a number of initiatives designed to strengthen its ability to manage its multifamily housing portfolio and address outstanding management deficiencies in its staffing, data systems, and management controls. As we reported in June 1995, the initiatives that HUD intended to carry out included (1) using contractors to collect more complete and current information on the physical and financial condition of insured multifamily properties and developing an "early warning system" to more quickly identify troubled properties and (2) deploying Special Workout Assistance Teams (SWAT) to help field offices deal with troubled insured multifamily properties, including the enforcement of HUD's housing quality standards there. However, progress continues to be slow in implementing these improvements. For example, the early warning system is not yet operational nor is the initiative to contract for periodic physical inspections. The current plans are to contract for these inspections beginning in fiscal year 1997. Also, while the SWAT initiative is regarded by HUD management and HUD's IG as effectively addressing problems, it is limited in scope and cannot be relied upon to address the Department's problems across the portfolio. For example, resource limitations preclude expanding this effort as a standard management tool--nor does this effort address the problem of excess subsidy costs. Our recent studies of HUD's nursing home and hospital programs also identified management deficiencies. We found that HUD does not have data that show how the programs support the Department's mission. For example, HUD does not collect and analyze information on whom the nursing home program is serving or measure the extent to which the hospital program accomplishes the Department's goals. In addition, our reports discuss the default risk of these multifamily programs. We found that the accumulation of more than $4 billion of insured hospital projects and the large loan amounts in New York pose risks to the future stability of the program. Furthermore, trends in health care and changes in state and federal health care policies that reduce hospitals' revenues could threaten the solvency of insured hospitals. We also noted that the nursing home program had recently been expanded to include assisted living facilities for the elderly, which may result in the program's growth and in potentially riskier loans, especially if HUD is unable to effectively underwrite insurance for the loans and monitor their performance. The financial situation for FHA's single-family mortgage insurance program is very different than that for its multifamily program. The economic net worth of FHA's single-family Mutual Mortgage Insurance Fund (Fund) continued to improve in fiscal year 1994. We estimate under our conservative baseline scenario that the Fund's economic net worth was $6.1 billion, as of September 30, 1994. At that time, the Fund had capital resources of about $10.7 billion, which were sufficient to cover the $4.6 billion in expenses that we estimate the Fund will incur in excess of the anticipated revenues over the life of the loans outstanding at that time. The remaining $6.1 billion is the Fund's economic net worth, or capital--an improvement of about $8.8 billion from the lowest level reached by the Fund at the end of fiscal year 1990. Legislative and other changes to FHA's single-family mortgage insurance program have helped restore the Fund's financial health, but favorable prevailing and forecasted economic conditions were primarily responsible for this improvement. Our estimate of the Fund's economic net worth represents a capital reserve ratio of 2.02 percent of the Fund's $305 billion in amortized insurance-in-force. Consequently, we estimate that the Fund surpassed the legislative target for reserves (a 2-percent capital ratio by Nov. 2000) during fiscal year 1994. One area in which the Congress could make changes that would have a positive effect on the Fund's financial health is in HUD's mortgage assignment program. The assignment program, created in 1959, is intended to help mortgagors who have defaulted on HUD-insured loans to avoid foreclosure and retain their homes by providing these mortgagors with financial relief by reducing or suspending their mortgage payments for up to 36 months until they can resume making payments. Our recent review of FHA's assignment program revealed that the program operates at a high cost to the Fund and has not been very successful helping borrowers avoid foreclosure in the long run. We estimated that about 52 percent of the borrowers who entered the program since fiscal year 1989 will eventually lose their homes through foreclosure. We forecast that the remaining borrowers (48 percent) will pay off their loans following the sale or refinancing of their homes, often after remaining in the program for long periods of time. The costs incurred by HUD to achieve this result exceed the costs that would have been incurred if all assigned loans had gone immediately to foreclosure without assignment. We estimated that, for borrowers accepted into the assignment program since fiscal year 1989, FHA will incur losses of about $1.5 billion more than would be incurred in the absence of the program. While FHA borrowers' premiums pay for these costs, not the U.S. Treasury, the program's costs make it more difficult for the Fund to maintain financial self-sufficiency. We reported that the Congress may wish to consider alternatives to reduce the additional losses incurred by the program. The alternatives we suggested focused on making changes to the program. Legislation is now pending that would eliminate the current program and replace it with an alternative that will, according to the Congressional Budget Office (CBO), result in an estimated savings of $2.8 billion over 7 years. The nation's 3,300 PHAs do not all have severe management problems nor do they share the same problems. Much of the public housing stock is in good condition and provides adequate housing for most of the over 3 million low-income residents. However, some PHAs we have visited are deeply troubled in many dimensions. These housing authorities' problems include an unmet need for capital improvements, physical deterioration of the housing stock, high vacancy rates, and high concentrations of poor and unemployed people. Moreover, before 1995, HUD's limited oversight of the most troubled housing authorities had allowed some authorities to provide substandard services to their residents for years. Some of our ongoing work deals directly with several of these interrelated problems that can lead to serious management and budget considerations for HUD. Housing authorities are caught in a very difficult position. At a time when they need larger operating subsidies to replace declining rent revenues, they also face appropriation realities brought on by the need to balance the federal budget and meet the needs of other low-income housing programs. Declining rent revenue is a direct result of targeting housing assistance to those with very low incomes. For instance, incomes of residents in public housing have dropped nearly half--from 33 percent of the area median in 1981 to about 17 percent today--thereby decreasing the availability of rental income to offset operating costs. In addition, the average vacancy rate increased from 5.8 percent in 1984 to 8 percent in 1995, further reducing the rental income available to PHAs. Making it more difficult to make ends meet, annual appropriations have not covered PHAs' operating subsidy needs for several years. The pending fiscal year 1996 appropriations bill that was vetoed by the President would have provided only 89.7 percent of their operating needs. In a survey of 21 judgmentally selected housing authorities, we found that one of the first responses to insufficient operating funds is to reduce spending on maintenance. This compounds PHAs' problems by perpetuating the cycle of decreased maintenance, increased vacancies, and decreased rental income. Can this cycle be broken? We believe that provisions in pending legislation, various proposals from HUD, and other programs could act together to alleviate some of the pressures on housing authorities. Both the proposed legislation and HUD's latest transformation plan, known as "Blueprint II," would foster admitting and retaining a higher proportion of working families and thus raising the total rental income. However, policymakers need to recognize that in some cities, this policy change could cause some people with very low incomes to wait longer to receive housing assistance. We believe that these legislative and regulatory changes will help maintain PHAs' financial health. However, HUD and the Congress need the cooperation of the public housing authority industry. Many housing authorities have told us that the current system is too cumbersome and is detrimental to promoting their fiscal health. Like organizations in the private sector, we believe PHAs are realizing that they must take the initiative and seek out management practices that can improve performance and efficiency. We are currently finding that many PHAs are initiating innovative practices to cut costs and increase revenues. These practices include privatization, consolidation, and partnerships. We will report later in the year on the use and applicability of these practices for all PHAs. We have concluded in the past that HUD's program for assisting troubled housing authorities should take a more active role in addressing their performance. We also reported last year that HUD had made limited use of its legal authority to declare troubled housing authorities in breach of their contracts with the Department. Moreover, the overall results of HUD's focused technical assistance program that targeted the large, troubled authorities have been inconsistent. During the past year, 4 troubled authorities have come off the original list of 17, and 4 others have made substantial improvements in their performance scores. However, the other nine authorities--accounting for over 70 percent of all housing units managed by troubled authorities--have not shown appreciable improvement. Furthermore, the performance of four of the nine declined this past year, despite HUD's intervention and technical assistance. HUD appears to be taking a more active role in this area. In addition to having some success with several large housing authorities, three times in the last 10 months--in Chicago, New Orleans, and San Francisco--HUD has made use of its authority to either declare an authority in breach of its contract or to take control upon the resignation of the authority's board of commissioners. However, taking over troubled housing authorities has not come without a price. HUD's top policymakers in public housing are simultaneously engaged in the everyday problems of managing HUD and overseeing several problem housing authorities. For example, HUD's Acting Assistant Secretary for Public and Indian Housing functions as the New Orleans Housing Authority's Board of Commissioners and leads HUD's takeover team in San Francisco. Approximately 11 local and headquarters HUD staff are at the New Orleans Housing Authority, and a similar staff will be placed at the San Francisco Housing Authority. In addition, the potential for other emergency takeovers looms in the future as reduced funding puts pressure on public housing managers to do more with less. Additional takeovers will considerably strain HUD's already-stretched management team at a time when a major reform of low-income housing may also require its attention. Last year, when we appeared before this Subcommittee, we discussed a CBO report that detailed how the number of assisted families almost doubled from 1977 through 1994, rising from about 2.4 million to about 4.7 million. According to CBO, the annual real outlays (in 1994 dollars) more than tripled during this period, rising from about $6.6 billion to about $22 billion. Difficult budget choices persist, most notably for renewing assistance under HUD's Section 8 programs. According to HUD's recently released plan to continue its reinvention, over the next 7 years the Department will face a significant challenge to its budget as Section 8 contracts providing affordable housing to hundreds of thousands of families expire and require renewal. HUD estimates that while outlays will remain relatively flat, the needed budget authority will balloon from $2 billion in fiscal year 1995 to $20 billion in fiscal year 2002 (assuming 1-year renewals). HUD notes that while contract renewals do not contribute significantly to the budget deficit, the demand for ever-increasing levels of budget authority cannot be met at a time of extremely tight fiscal constraints unless fundamental policy and procedural changes are made. HUD's plan states that, to date, decisionmakers have met this challenge, in part by shortening the terms of contract renewals from 5 years in the early 1990s to 4 years in fiscal year 1994, 3 years in 1995, and now 2 years in 1996. Shorter terms substantially reduce the amount of budget authority needed to renew a Section 8 contract. However, HUD concluded that even shortening contract renewal terms to 1 year may not be sufficient to cover the budget authority needs resulting from the cascade of expiring contracts in the next half decade. HUD noted that a very real danger exists for its budget allocation to be sharply reduced because of the deep reductions in the discretionary budget caps that are now under consideration. If these reductions occur, according to HUD, the budget authority available for the Department's other discretionary programs, such as community development block grants, programs for the homeless, and public housing, could be drastically reduced or even eliminated. We agree that these large figures present difficult choices for policymakers who must consider competing needs. These choices become even more difficult because they come at a time when, according to HUD, the "worst case" needs for housing have not been met for a record 5.3 million households. HUD's serious management and budget problems have greatly hampered its ability to carry out its wide-ranging responsibilities. Both houses of Congress and HUD have proposed major but different reforms, including the ultimate reform--the complete dismantling of HUD. With the high stakes involved--the tens of billions of dollars that HUD spends each year, the millions of vulnerable families (including millions of households that do not receive assistance from HUD because of budget constraints), and the overwhelming needs of distressed communities--it is not unexpected that deciding the future direction of housing and community development policy and of HUD will take some time. Balancing business, budget, and social goals is a Herculean task. Legislation to reform HUD has been introduced in both houses of Congress. HUD has continued to refine its vision for a reformed agency through successive versions of its "blueprint." What is needed now is for the Congress and the administration to agree on the future direction of housing and community development policy. This agreement should weigh the inherent trade-offs involved in understanding the magnitude of the needs of poor families and individuals, communities, first-time home buyers, and others that HUD currently serves; deciding who it is that federal housing and community development policy will serve and the priority of competing needs; deciding the mechanisms for delivering services (e.g., block grants) to meet those needs, and the federal, state, and local roles in service delivery; and determining how much to spend. Mr. Chairman, this concludes our prepared remarks. We will be pleased to respond to any questions that you and other Members of the Subcommittee may have. We in GAO look forward to working with the Congress to help address the issues before it. FHA Hospital Mortgage Insurance Program: Health Care Trends and Portfolio Concentration Could Affect Program Stability (GAO/HEHS-96-29, Feb. 27, 1996). Homeownership: Mixed Results and High Costs Raise Concerns About HUD's Mortgage Assignment Program (GAO/RCED-96-2, Oct. 18, 1995). Multifamily Housing: Issues and Options to Consider in Revising HUD's Low-Income Housing Preservation Program (GAO/T-RCED-96-29, Oct. 17, 1995). Housing and Urban Development: Public and Assisted Housing Reform (GAO/T-RCED-96-25, Oct. 13, 1995). Housing and Urban Development: Public and Assisted Housing Reform (GAO/T-RCED-96-22, Oct. 13, 1995). Block Grants: Issues in Designing Accountability Provisions (GAO/AIMD-95-226, Sept. 1, 1995). HUD Management: Greater Oversight Needed of FHA's Nursing Home Insurance Program (GAO/RCED-95-214, Aug. 25, 1995). Property Disposition: Information on HUD's Acquisition and Disposition of Single-Family Properties (GAO/RCED-95-144FS, July 24, 1995). Housing and Urban Development: HUD's Reinvention Blueprint Raises Budget Issues and Opportunities (GAO/T-RCED-95-196, July 13, 1995). Public Housing: Converting to Housing Certificates Raises Major Questions About Cost (GAO/RCED-95-195, June 20, 1995). Purpose of, Funding for, and Views on Certain HUD Programs (GAO/RCED-95-189R, June 20, 1995). Multifamily Housing: HUD's Mark-to-Market Proposal (GAO/T-RCED-95-230, June 15, 1995). Multifamily Housing: HUD's Proposal to Restructure Its Portfolio (GAO/T-RCED-95-226, June 13, 1995). Government Restructuring: Identifying Potential Duplication in Federal Missions and Approaches (GAO/T-AIMD-95-161, June 7, 1995). HUD Management: FHA's Multifamily Loan Loss Reserves and Default Prevention Efforts (GAO/RCED/AIMD-95-100, June 5, 1995). Program Consolidation: Budgetary Implications and Other Issues (GAO/T-AIMD-95-145, May 23, 1995). Government Reorganization: Issues and Principles (GAO/T-GGD/AIMD-95-166, May 17, 1995). Multifamily Housing: Better Direction and Oversight by HUD Needed for Properties Sold With Rent Restrictions (GAO/RCED-95-72, Mar. 22, 1995). Housing and Urban Development: Reform and Reinvention Issues (GAO/T-RCED-95-129, Mar. 14, 1995). Housing and Urban Development: Reforms at HUD and Issues for Its Future (GAO/T-RCED-95-108, Feb. 22, 1995). Housing and Urban Development: Reinvention and Budget Issues (GAO/T-RCED-95-112, Feb. 22, 1995). High-Risk Series: Department of Housing and Urban Development (GAO/HR-95-11, Feb. 1995). Housing and Urban Development: Major Management and Budget Issues (GAO/T-RCED-95-86, Jan. 19, 1995, and GAO/T-RCED-95-89, Jan. 24, 1995). Reengineering Organizations: Results of a GAO Symposium (GAO/NSIAD-95-34, Dec. 13, 1994). Federally Assisted Housing: Expanding HUD's Options for Dealing With Physically Distressed Properties (GAO/T-RCED-95-38, Oct. 6, 1994). Rural Development: Patchwork of Federal Programs Needs to Be Reappraised (GAO/RCED-94-165, July 28, 1994). Federally Assisted Housing: Condition of Some Properties Receiving Section 8 Project-Based Assistance Is Below Housing Quality Standards (GAO/T-RCED-94-273, July 26, 1994, and Video, GAO/RCED-94-01VR). Public Housing: Information on Backlogged Modernization Funds (GAO/RCED-94-217FS, July 15, 1994). Homelessness: McKinney Act Programs Provide Assistance but Are Not Designed to Be the Solution (GAO/RCED-94-37, May 31, 1994). Section 8 Rental Housing: Merging Assistance Programs Has Benefits but Raises Implementation Issues (GAO/RCED-94-85, May 27, 1994). Lead-Based Paint Poisoning: Children in Section 8 Tenant-Based Housing Are Not Adequately Protected (GAO/RCED-94-137, May 13, 1994). HUD Information Resources: Strategic Focus and Improved Management Controls Needed (GAO/AIMD-94-34, Apr. 14, 1994). Multifamily Housing: Status of HUD's Multifamily Loan Portfolios (GAO/RCED-94-173FS, Apr. 12, 1994). Housing Finance: Expanding Capital for Affordable Multifamily Housing (GAO/RCED-94-3, Oct. 27, 1993). Government National Mortgage Association: Greater Staffing Flexibility Needed to Improve Management (GAO/RCED-93-100, June 30, 1993). Multifamily Housing: Impediments to Disposition of Properties Owned by the Department of Housing and Urban Development (GAO/T-RCED-93-37, May 12, 1993). HUD Reforms: Progress Made Since the HUD Scandals but Much Work Remains (GAO/RCED-92-46, Jan. 31, 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 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 management and budget problems facing the Department of Housing and Urban Development (HUD). GAO noted that: (1) weak internal controls, an ineffective organizational structure, an insufficient staff skill mix, and inadequate information and financial management systems have hampered HUD ability to carry out its mission and led to GAO designating HUD as a high-risk area in January 1994; (2) despite some progress in curing management deficiencies, problems persist and, as a result, will likely continue to make HUD vulnerable to waste, fraud, and abuse; (3) HUD and Congress must try to reduce excessive housing subsidies, address the physical inadequacies of insured multifamily properties, maintain the single-family insurance fund's financial health, address public housing's social, management, and budget problems, and contain the costs of renewing housing subsidy contracts for lower-income families; (4) Congress and HUD also need to reexamine and reach consensus on housing and community development policy; and (5) HUD downsizing will likely affect its ability to limit financial exposure, carry out its mission, and correct Department-wide management and information system problems.
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Every state regulates the terms and conditions of insurance sold in the state and nearly all tax insurers. States require health insurance policies sold there to include specific benefits, such as mental health services, mammography screening, chiropractic services, and coverage for newborns. States use a variety of methods to monitor health insurers' solvency, including minimum capital and surplus levels, investment restrictions, and financial reviews. In addition, many states have enacted reforms to improve access and affordability of health insurance for small employers. Prominent examples of these reforms are guaranteed issuance and renewal, portability, and premium rate restrictions. These reforms are intended to address concerns about certain individuals being excluded from coverage or priced out of the market. These individuals include those who change jobs or experience costly medical conditions while in the small employers' insurance market. Although states regulate health insurance, state regulation does not directly affect 4 of 10 people with private employer-based health coverage. ERISA preempts states from directly regulating employer provision of health plans, but it permits states to regulate health insurers. Of the 114 million Americans with health coverage offered through a private employer in 1993, about 60 percent participated in insured health plans that are subject to state insurance regulation. However, for plans covering the remaining 40 percent--about 44 million people in 1993--the employer chose to self-fund and retain at least some financial risk for its health plan. Self-funding is most common among large employers. Only 11 percent of employees in firms of 100 or fewer employees were in self-funded health plans compared with 34 percent of those in firms of 101 to 500 employees and 63 percent of those in firms of more than 500 employees, according to a 1993 Robert Wood Johnson Foundation survey. As stop-loss coverage with less risk to the employer becomes available, however, more small employers may start to self-fund. The NAIC has adopted a stop-loss model act that attempts to define the levels of risk that can be assumed by stop-loss carriers for determining which state insurance laws should apply. State insurance regulators are concerned that some employers may purchase stop-loss coverage in which the stop-loss carrier assumes most of the risk and believe, therefore, that the plan should be subject to state health insurance laws. Because self-funded health plans may not be deemed to be insurance, ERISA preempts them from state insurance regulation and premium taxation. Although ERISA includes fiduciary standards to protect employee benefit plan participants and beneficiaries from plan mismanagement and other requirements, in other areas no federal requirements comparable with state requirements for health insurers exist for self-funded health plans. Table 1 compares the requirements that fully insured and self-funded health plans must meet. One of the most direct and quantifiable costs that insured health plans incur compared with self-funded health plans results from state premium taxes and other assessments paid by health insurers. Most of the costs associated with taxes result from premium taxes that increase costs to insured health plans by about 2 percent in most states. In addition, states also assess insurers for other purposes, but these assessments are generally small and, in many states, the insurer may receive a credit from its premium taxes for these payments. Most states tax health insurance premiums. State revenues from premium taxes on all types of insurance, including property, casualty, life, and health insurance, totaled over $8 billion in 1993. Premium taxes for commercial health insurers range from 0 to over 4 percent; most states have premium tax rates of about 2 percent. Many states exempt or have lower rates for Blue Cross and Blue Shield plans as well as health maintenance organizations (HMO). In some states insurers receive credits that lower their premium tax rates, such as credits for insurers who are headquartered locally or invest in state securities. In addition, the expense of state taxes can be deducted from insurers' federal taxes, reducing their net cost. See appendix I for a list of premium tax rates by state and type of insurance. Health insurers may also be liable for paying other miscellaneous assessments collected by the states, including assessments for guaranty funds and high-risk pools. Guaranty funds provide financial protections to enrollees who have outstanding medical claims in the case of an insurer insolvency. In years that monies are drawn from the guaranty funds due to an insurance failure, states assess insurers a fee on the basis of their market share within the state to pay for the guaranty fund expenses. States cap the maximum rate insurers may be assessed in a year, typically at about 2 percent of gross premiums. Except in a few states where a relatively large insurer has failed, however, actual assessments are much lower than the maximum rate. In 1993, actual assessments against life and health insurers for guaranty funds averaged 0.34 percent, and guaranty fund assessments exceeded 1 percent of premiums in only seven states. Most states allow insurers to deduct some or all of the guaranty fund assessment from their premium taxes. Appendix II shows state assessments for guaranty funds and deductions from premium taxes. About half of the states maintain high-risk pools to provide health coverage for individuals denied health coverage because of a medical condition. In 1994, about 100,000 Americans were covered by high-risk pools. Although participants in these plans pay a premium for their coverage, the costs of the high-risk pools exceed the premiums collected. To compensate for the difference in premiums collected and claims paid, 20 states have the authority to assess insurers who participate in the high-risk pool. In 1994, 15 states actually assessed insurers to cover high-risk pool losses. Minnesota, with the largest high-risk pool in the nation, assessed insurers 1.7 percent of their premiums in 1995 to cover high-risk pool losses. Most states with assessments (although not Minnesota) allow insurers to offset at least some of the expense of the high-risk pool assessments from their premium taxes. Appendix III shows state assessments for high-risk pools. Table 2 summarizes the costs to health insurers of the various state taxes. Most insurers and HMOs are likely to pass on the costs of these taxes to their customers through higher premiums. However, their ability to do so depends on such factors as the competitiveness of the market, size of the employer, and insurer's marketing strategy. The cost impact of mandated benefits varies because states differ in the number and type of benefits mandated. The available studies reflect this cost variation, estimating higher claims costs in states with the most mandated benefits and more costly benefits, such as treatment for mental health and substance abuse. However, the studies are limited because their measurement of costs does not account for certain other cost elements, including administrative costs for multistate employers and a loss of flexibility claimed by employers in designing cost-effective benefit packages. In addition, reported cost estimates often do not measure the incremental cost of adding a mandated benefit to a health insurance package; instead, the estimates represent the fraction of total health insurance claims that are paid for each of the mandated benefits. Furthermore, claims costs may exaggerate the differences in costs between insured and self-funded health plans because many commonly mandated benefits are often covered by employers who self-fund even though they are not subject to state regulation. On average, states have enacted laws mandating about 18 specific benefits. As shown in figure 1, 16 states have over 20 mandated benefits; 8 states have 10 or fewer mandates. Maryland (39), Minnesota (34), and California (33) have the most mandated benefits. In contrast, Idaho has only six mandated benefits; Alabama, Delaware, Vermont, and Wyoming each have eight mandated benefits. States most frequently mandate coverage for preventive treatments, such as mammograms and well child care, or for treatment of mental illness or alcohol and drug abuse. In addition, states often require coverage for some types of providers such as optometrists and chiropractors. States typically mandate that insurers cover specific benefits in all plans sold, but some states merely mandate that each insurer make the mandated service available in at least one plan that it offers. Appendix IV shows how many states have enacted each of 20 commonly mandated benefits. In addition, many states have recently begun considering mandating that health insurance cover minimum postpartum hospital stays. For example, a state may require the insurer to cover 48 hours of hospitalization following a vaginal delivery or 96 hours following a caesarian delivery if recommended by the doctor, although in some states shorter stays may be allowed if they are accompanied by a home visit by a nurse or other medical professional. According to the American College of Obstetricians and Gynecologists, as of July 28, 1996, 28 states have enacted laws requiring coverage for postpartum care. Studies conducted in several states between 1987 and 1993 provide varying estimates of the claims costs associated with mandated benefits. (See table 3.) The Virginia State Corporation Commission, for example, has required insurers to report cost and utilization information annually for each of the mandated benefits in the state. Overall, the commission's report, the most recent of these studies, estimated that Virginia's mandated benefits accounted for about 12 percent of group health insurance claims in 1993. An earlier study in Maryland, the state with the most mandated benefits, estimated that mandated benefits represented 22 percent of average claims costs in 1988. In Iowa, a state representing the other extreme, a 1987 study estimated that the potential costs of introducing several commonly mandated benefits would be about 5 percent of claims costs. The differences in the cost estimates reported by the various studies are in part due to the number of mandated benefits included in each state. For example, the studies that reported the highest estimated costs were those for Maryland and Massachusetts, which have more mandated benefits than most states. Thus, these cost estimates cannot be generalized to other states. Although the studies reported varying total costs in different states, they generally agreed that several specific mandated benefits accounted for a large share of the costs. In particular, obstetrical care and mental health care were cited as among the most costly mandated benefits; other commonly mandated benefits, such as mammography screening, account for less than 1 percent of costs. For example, in Virginia, obstetrical care, mental health care, and substance abuse benefits accounted for over half of the total claims costs associated with mandated benefits in 1993. Table 4 lists the costs of individual mandates in Virginia. In some cases, mandated benefits covering services offered by some alternative types of providers, such as nurse midwives, may reduce costs because they substitute for more costly forms of care. Some provider mandates, however, may also increase the demand for services, increasing costs. For example, although chiropractic services may be a less expensive alternative for some treatments, mandating their coverage may also lead to increased use. One limitation of most studies on mandated benefits is that they have examined the cost effect of mandated benefits using the fraction of the total health insurance claims costs paid for each benefit, instead of estimating the incremental cost of adding a benefit to the health insurance package. In addition, the reported cost estimates do not necessarily capture the actual effect on employers' costs, especially in cases in which all costs associated with a mandate do not occur at the same point in time. For example, one actuary estimated that including in vitro fertilization services in health plans would increase premiums by less than 1 percent. In the case of one self-funded employer, however, the total costs to the employer of in vitro fertilization would be greater than the initial cost of the service because multiple attempts are often required and its use may lead to costly, high-risk pregnancies or multiple childbirths. Moreover, multistate employers note that the variation in state-mandated benefits results in additional administrative cost that is not reflected in the studies' estimates. Employers that purchase health insurance may need to modify their plans to meet differences in state-mandated benefits. Furthermore, employers are concerned that, to the extent that they must comply with mandated benefits, they lose the flexibility to design the most cost-effective health benefit plan to meet their employees' needs. Employers and managed health care plans have also expressed concern about the potentially high costs associated with any-willing-provider laws. The actual cost impact of these laws, however, as they have been enacted by states is likely to be limited. Any-willing-provider laws require managed health care plans to accept any qualified provider who wants to participate and is willing to accept the plans' contract terms. The few available studies have examined only hypothetical results of broad any-willing-provider laws and provide no definitive measure of actual costs of the laws that have been implemented. The actual costs of enacted laws would be more limited than the studies' estimates because most states have passed versions with narrow scopes. The American Association of Health Plans (AAHP) reported that, as of April 1996, 19 of the 24 states with any-willing-provider laws limit them to particular providers, such as pharmacists, or particular types of managed care plans. Furthermore, any-willing-provider laws have been enacted mostly in states with relatively low managed care penetration. AAHP reported that 24 percent of HMO enrollees are in states with limited any-willing-provider requirements, and less than 2 percent are in states with broad any-willing-provider laws. The actual cost effect of mandated benefits to employers also depends on whether the employer offers a comprehensive or limited health plan, which in turn often depends on the size of the employer. Employers frequently offer many of the commonly mandated benefits, even employers who self-fund and are not subject to the state mandates. In general, large employers are more likely to self-fund their health plans and tend to offer more comprehensive benefits than small employers. For small employers, who typically purchase fully insured health plans and are less likely to offer any health coverage, mandates may impose claims costs for benefits that they otherwise might not have covered. Studies conflict about whether increased costs associated with mandated benefits lead small employers to drop health insurance coverage. Self-funded health plans typically offer many of the benefits commonly mandated by states for fully insured health plans, according to studies. This may be due in part to the labor market, where firms must offer competitive health plans to compete for labor. As shown in figure 2, a KPMG Peat Marwick survey of employer benefits among all firm sizes indicates that self-funded health plans are more likely to offer well child care, outpatient alcohol treatment, outpatient drug treatment, mental health benefits, and chiropractic care than fully insured health plans. This survey also reported similar patterns for other benefits that are not typically mandated, including prescription drugs, adult physicals, and dental benefits. Similarly, a survey of Wisconsin insurers also found that "self-funded health plans provide at least as many of the mandated benefits as insured health plans and in some cases provide more generous coverage." This result may partially be due to the tendency of large employers to both self-fund and offer more comprehensive benefits. Although self-funded plans often offer the same types of benefits states commonly mandate for insurers, self-funded plans may include features that differ from those required by state mandates. For example, state mandates generally specify a minimum number of days of care that insurers must cover for inpatient mental health care. One employer association indicated that many employers prefer designing more flexible mental health benefits, for example, requiring case management rather than specifying a limited number of days of care. Thus, even though 97 percent of self-funded plans offer inpatient mental health care services, some of these plans would not meet the state requirements for fully insured health plans. Assessing the cost differences between self-funded and fully insured health plans resulting from mandated benefits is difficult. To the extent that self-funded health plans offer benefits that are like state-mandated benefits, their claims costs would not significantly differ because of their exemption from state-mandated benefit laws. For less commonly offered benefits, such as in vitro fertilization, self-funded employers would face additional claims costs if they were required to meet the state mandates. In addition, if employers who self-fund their health plan were required to comply with state mandates, they would lose flexibility in choosing the benefits to offer and in offering a single uniform health plan in many states. State solvency requirements add costs only to the extent that they exceed prudent industry practices a health insurance carrier would follow in the absence of state requirements. States use a variety of methods to monitor health insurers' solvency, including minimum capital and surplus levels, investment restrictions, and financial reviews. The specific requirements vary both by state and by type of insurance. State laws generally require insurers to maintain a minimum level of capital or surplus to become licensed, but this level is a small fraction of most insurers' assets. The minimum levels of capital and surplus vary by state and by type of insurance, ranging in 1993 from $200,000 to $5 million. Most insurers have capital and surplus levels that exceed these minimum requirements. For example, Maryland requires insurers selling both life and health insurance to have a minimum of $3.75 million in capital and surplus to be licensed. In comparison, as of December 31, 1994, the actual capital and surplus level for life and health insurers licensed in Maryland averaged $200 million. The cost effect of the minimum requirements can be more significant for small insurers, however. According to data from the Maryland Insurance Administration, 19 percent of life and health insurers licensed in Maryland had less than $10 million in capital and surplus. Although some insurers may need to keep higher levels of capital and surplus to comply with the minimum levels that states require under the NAIC-developed model risk-based capital standards, most insurers also exceed these levels. Under risk-based capital, a level (called the "control level") is calculated for each health plan based on its unique characteristics. If a health plan's reserves were to fall below this level, the state is authorized to take control of the insurer. A range of regulatory actions would occur if an insurer were to approach this control level. At 200 percent of the control level, the state requires an insurer to prepare a plan to increase its capital; at the extreme, if the insurer's capital were below 70 percent of the authorized control level, the insurance commission would have to take control of the insurance company. However, standard industry practices tend to be similar to or exceed these minimum state requirements. For example, a representative of the Health Insurance Association of America told us that 90 percent of insurers in 1995 exceeded 250 percent of the authorized control level for risk-based capital. In addition, a Virginia state official noted that, since Virginia adopted enforcement actions based on NAIC's risk-based capital formula in July 1995, no insurers have fallen below the level where state standards would require action. Blue Cross and Blue Shield plans have different requirements under state laws. For example, many states set target capital and surplus levels for Blue Cross and Blue Shield health plans to ensure that they have sufficient funds to cover, for example, 1 or 2 months of claims. Furthermore, to maintain their nonprofit status, some states require that Blue Cross and Blue Shield plans' surplus not exceed a target level, such as 7 months' claims. In addition, states restrict how insurers invest their funds, potentially imposing an opportunity cost on insurers who might otherwise invest in higher yielding assets. These investment restrictions vary by state, but in general states regulate the type and amount of assets in which health plans invest to diversify insurers' investments and minimize their risk. For example, many states limit the amount of funds that a health insurance carrier may invest in certain types of investments, such as common stocks and foreign securities, with potentially higher return rates than other permitted investments. The risk associated with these investments is also greater, however, so the insurer could get a lower rate of return than with permitted investments. An insurer could even lose money, possibly damaging its solvency. Furthermore, actuaries note that investments typically provide a smaller share of income to health insurers than other types of insurance such as life insurance. States' oversight of health insurers' solvency may also add administrative costs to insurers who must comply with reporting and review requirements, but industry officials note that such costs are difficult to quantify. The administrative costs include preparing audited financial statements and actuarial analyses for state review, functions insurers would likely perform anyway. States require insurers to report financial information using NAIC's accounting standards, however, which differ from generally accepted accounting principles in their valuation of assets. In some cases, this may require an insurer to maintain two sets of accounting data, but insurance company executives we spoke with said this is a marginal additional cost. The costs of actuarial certification vary by type of insurance. Insurers selling only health coverage may prepare a simplified actuarial certification that requires few resources. Insurers selling health and life coverage must prepare a more extensive actuarial certification that would be more costly. One insurer, however, noted that the information developed for the actuarial certification provides the insurer with valuable information on the adequacy of the insurer's reserves for meeting anticipated costs. Finally, many states charge the insurer for the costs of on-site financial examination, which typically occur once every 3 to 5 years. The costs of these exams vary depending on their length and complexity, but one state reported that the cost can be as high as $1 million for a complex review of a large insurer; less complex ones may cost less than $100,000. Most states have recently passed legislation designed to improve portability, access, and rating practices for the small employer health insurance market. It is too early to assess the cost effects of these reforms definitively because most available information is anecdotal. Moreover, even if more systematic data were available, isolating the effect of small group reforms from other factors would be difficult in the currently dynamic health care market. The small group reforms include provisions to help ensure that (1) employees who want health insurance coverage will be accepted and renewed by insurers; (2) waiting periods for preexisting conditions will be relatively short, occur only once, and be based only on recent medical history; (3) coverage will be continuous and portable, even when an individual changes jobs or the employer changes insurers; and (4) wide variation in premium rates will be narrowed to fall within state-specified ranges. In an earlier report, we identified 45 states that passed legislation between 1990 and 1994 regulating the small employer health insurance market (typically fewer than 25 or 50 employees). We also noted that the specific state requirements vary both by state and from the NAIC model act. The available evidence on states' early experience with small group reform is mostly testimonial, anecdotal, and often contradictory. Following are examples of some of this evidence. The Colorado Insurance Division reports that small employer reforms, including guaranteed issue and rate restrictions, have moderated premium increases and increased the number of individuals covered by small group health plans. Some initial reports on New York's experience stated that insurers left the state and premiums increased. Subsequent reports, however, have questioned the extent of these problems. Furthermore, state officials note that most changes occurred in the individual market rather than the small employer market and resulted from other factors, particularly the financial status of the state's largest insurer. Minnesota and Colorado officials point to the decline in enrollment in their high-risk pools as evidence of the success of small group reforms in making private health coverage more available. Washington's reforms, which were partially repealed before implementation, resulted in a surge in high-cost, high-risk enrollees that has led insurers to warn of high premium increases and their potential withdrawal from the state. Maryland officials asserted that in the first year of implementing small employer reforms competition in the small group health insurance market has increased and premiums have declined, but they acknowledged that data on premiums before the reforms were sparse. As these examples illustrate, the results across states are not consistent or generalizable to other states' experiences. Furthermore, even within the states noted above, conflicting views exist about the success or failure of the small group reforms. Some states have specifically designed their reforms to minimize potential cost increases. For example, the task force that developed Maryland's reforms designed the benefits package to cost less than 12 percent of average wages in Maryland. Ohio state officials scaled back their original reforms after receiving estimates that they could increase costs. As a result, Ohio enacted less generous requirements for guaranteed coverage. In addition, because the private insurance market has been changing rapidly, the effect these reforms have had on health insurance premiums is difficult to isolate. Besides the small employer insurance reforms, factors affecting insurance premiums include nationwide declines in the growth rate of health care costs, the growth of managed care, changes in health benefits, and the expansion of Medicaid coverage. Small group reforms may also have redistributive effects, with some enrollees facing increased costs while others face reduced costs, making the net effect unclear. Changes resulting from small group reforms may take several years to play out fully. Finally, the paucity of data preceding the enactment of reforms may hamper before-and-after comparisons of insurance premiums. State requirements on health insurance and their effects raise two questions: who is affected directly, and what factors determine the size of the requirements' cost impact? Under the ERISA statute, state governments cannot tax or regulate self-funded plans established by an employer who bears most of the financial risk. By contrast, states continue to have authority to tax and regulate health insurance. As a result, enrollees in insured health plans have the benefits associated with state regulation but also bear an additional cost relative to enrollees in self-funded health plans. This cost differential can differ considerably by state. Specifically, state taxes on health insurers raise the costs of fully insured plans by about 2 percent in most states, with the actual level determined by state tax rate and type of health plan. In addition, the extent to which mandated benefits and solvency requirements raise costs differs by state, depending upon the scope of state laws. Furthermore, the extent to which a cost differential between self-funded and insured health plans would be apparent depends on whether state regulation results in a change in employers' and insurers' behavior. At the extreme, for health plans that provide comprehensive benefits and maintain surpluses exceeding state minimum requirements, the cost differential may be nonexistent. The burden of state requirements on large versus small employers depends on the employers' use of self-funding. Because large employers' health plans are predominantly self-funded (and outside the states' purview) and small employers generally purchase health coverage from private insurers, the costs associated with state requirements fall largely on small employers. But this may be changing. Some small employers are also beginning to self-fund, partly to avoid state regulation and taxation of their health plans. Whether this trend will continue, and at what rate, is unclear. NAIC officials provided us with comments on a draft of this report. They pointed out that although the costs associated with state requirements are accurately described, the benefits to plan participants are addressed only to a limited extent. We acknowledge that participants benefit from many state requirements. As noted earlier, our ERISA report more comprehensively describes the state and employer perspectives on the implications of ERISA preemption of state regulation. As agreed to with our requester, our primary focus in this report was to provide additional information on the costs associated with these state requirements. In addition, NAIC officials noted that the report could also address "the costs that employers and employees might face when covered through ERISA-governed plans." Indeed, ERISA requirements, such as reporting, disclosure, and fiduciary responsibilities, may have associated costs. As noted in the report, however, these costs are borne by all ERISA-governed plans, including both fully insured and self-funded health plans. Thus, they do not lead to a differential in costs between fully insured and self-funded health plans in the way that state requirements applying only to fully insured health plans may. NAIC officials also provided technical comments, which we incorporated where appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to interested parties and make copies available to others upon request. Please call me on (202) 512-7114 if you or your staff have any questions about this report. Other major contributors are listed in appendix V. Health insurers (percent) Blue Cross and Blue Shield plans (percent) HMOs (percent) (continued) Health insurers (percent) Blue Cross and Blue Shield plans (percent) HMOs (percent) 0.75 aaTax assessed on subscriber fees. bbPay insurance commission maintenance assessment of no more than 0.1 percent of premium, with a minimum of $300. ccAdditional fee assessed for Department of Insurance operations, not to exceed 0.125 percent of receipts. ddHMOs pay franchise tax of 7.9 percent. Assessment cap (percent) Actual assessment, 1993 (percent) Percent offset from premium taxes (continued) Assessment cap (percent) Actual assessment, 1993 (percent) Participants (Dec. 31, 1994) Michael Gutowski, Assistant Director, (202) 512-7128 John Dicken, Senior Evaluator, (202) 512-7135 Carmen Rivera-Lowitt, Senior Evaluator, (202) 512-4342 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 provided information on the costs of state health insurance requirements, focusing on: (1) premium taxes on insured health plans; (2) mandated health benefits; (3) financial solvency standards; and (4) state health insurance reforms affecting small employers. GAO found that: (1) state health insurance regulation imposes requirements and costs on third-party health plans, but not on employers' self-funded health plans; (2) state premium taxes and other assessments for guaranty fund and high-risk pool fees, are the most direct and quantifiable costs on insured health plans; (3) the extent to which these requirements increase insured health plans' costs varies by state because of differences in the nature and scope of state regulation and plans' operating practices; (4) most states mandate that insurance policies cover certain benefits and providers that might not otherwise be covered; (5) costs are higher in states that mandate more costly benefits; (6) most self-funded health plans offer many of the same mandated benefits, but these plans would lose flexibility in offering uniform health plans across all states; (7) state solvency standards have a limited potential effect on plan costs, since most insurers maintain capital and surplus levels that exceed state minimum requirements and typically perform tasks similar to state reporting requirements; and (8) the cost implications of states' small employer health insurance reforms are unclear because of incomplete cost data and the difficulty of isolating the impact of such reforms.
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To be prepared for major public health threats such as an influenza pandemic, public health agencies need several basic capabilities, including disease surveillance systems. Specifically, to detect cases of pandemic influenza, especially before they develop into widespread outbreaks, local, state, and federal public health officials as well as international organizations collect, analyze, and share information related to cases of the disease. When effective, surveillance can facilitate timely action to control outbreaks and promote informed allocation of resources to meet changing disease conditions. Influenza is more severe than some other viral respiratory infections, such as the common cold. Most people who get influenza recover completely in 1 to 2 weeks, but some develop serious and potentially life-threatening medical complications, such as pneumonia. People aged 65 and older, people of any age with chronic medical conditions, children younger than 2 years, and pregnant women are more likely than other people to develop severe complications from influenza. Influenza and pneumonia rank as the fifth leading cause of death among persons aged 65 and older. Influenza viruses undergo minor but continuous genetic changes from year to year. Almost every year, an influenza virus causes acute respiratory disease in epidemic proportions somewhere in the world. Vaccination is the primary method for preventing influenza and its more severe complications. Influenza vaccine is produced and administered annually to provide protection against particular influenza strains expected to be prevalent that year. Influenza vaccine takes several months to produce. Deciding which viral strains to include in the annual influenza vaccine depends on data collected from domestic and international surveillance systems that identify prevalent strains and characterize their effect on human health. FDA decides which strains to include in the vaccine and also licenses and regulates the manufacturers that produce the vaccine. HHS has limited authority, however, to directly control influenza vaccine production and distribution. FDA has approved four antiviral medications (amantadine, rimantadine, oseltamivir, and zanamivir) for prevention and treatment of influenza. However, influenza virus strains can become resistant to one or more of these drugs, and so they may not always be effective. In the United States, responsibility for disease surveillance is shared-- involving health care providers; more than 3,000 local health departments, including county, city, and tribal health departments; 59 state and territorial health departments; more than 180,000 public and private laboratories; and public health officials from multiple federal departments and agencies. States, through the use of their state and local health departments, have principal responsibility for protecting the public's health and therefore take the lead in conducting disease surveillance and supporting response efforts. According to the Institute of Medicine (IOM), most states require health care providers to report any unusual illnesses or deaths--especially those for which a cause cannot be readily established. Generally, local health departments are responsible for conducting initial investigations into reports of infectious diseases. Laboratory personnel test clinical and environmental samples for possible exposures and identification of illnesses. Epidemiologists in health departments use disease surveillance systems to detect clusters of suspicious symptoms or diseases in order to facilitate early detection and treatment. Local and state health departments monitor disease trends. Local health departments are also responsible for sharing information they obtain from providers or other sources with their state departments of health. State health departments are responsible for collecting surveillance information--which they share on a voluntary basis with CDC and others--from across their state and for coordinating investigations and response efforts. Public health officials provide needed information to the clinical community and the public. At the federal level, several departments and agencies are involved in disease surveillance and response. For example, HHS has primary responsibility for coordinating the nation's response to public health emergencies. As part of its mission, the department has a role in planning to prepare for and respond to an influenza pandemic. One action the department has taken is the development of a draft national pandemic influenza plan, titled "Pandemic Influenza Preparedness and Response Plan." CDC is charged with protecting the nation's public health by directing efforts to prevent and control diseases and responding to public health emergencies. It has primary responsibility for conducting national disease surveillance and developing epidemiological and laboratory tools to enhance disease surveillance. CDC also provides an array of technical and financial support for state infectious disease surveillance efforts. In addition, CDC participates in international disease and laboratory surveillance sponsored by WHO. FDA is responsible for ensuring that new vaccines and drugs are safe and effective and for conducting research on diagnostic tools and treatment of disease outbreaks. The agency also regulates and licenses vaccines and antiviral agents through the Center for Biologics Evaluation and Research and the Center for Drug Evaluation and Research, respectively. FDA also develops influenza viral reference strains and reagents and makes them available to manufacturers for vaccine development and evaluation. The Department of Defense (DOD) contributes to global disease surveillance, training, research, and response to emerging infectious disease threats. DOD maintains the DOD Influenza Surveillance Program, a laboratory-based surveillance program. DOD maintains multiple sites throughout the world that serve as sentinels for disease outbreaks, where it collects and analyzes viral specimens. The Department of Agriculture (USDA) is responsible for protecting and improving the health and marketability of animals and animal products by preventing, controlling, and eliminating animal diseases. USDA undertakes disease surveillance and response activities to protect U.S. livestock, ensure the safety of international trade, and contribute to the national zoonotic disease surveillance effort. The United States is a member of WHO, which is responsible for coordinating international disease surveillance and response efforts. An agency of the United Nations, WHO administers the International Health Regulations, which outline WHO's role and the responsibility of member countries and regions in preventing the global spread of infectious diseases. WHO also helps marshal resources from its members to control outbreaks within individual countries or regions. In addition, WHO works with national governments to improve their surveillance capacities through--for example--assessing and redesigning national surveillance strategies, offering training in epidemiologic and laboratory techniques, and emphasizing more efficient communication systems. Surveillance is a key component in planning for an influenza pandemic, and federal public health officials plan to rely on the nation's existing annual influenza surveillance system and enhancements to identify an influenza pandemic. Federal public health officials have undertaken several initiatives that are intended to enhance influenza surveillance capabilities. These initiatives have been undertaken both through programs specific to influenza as well as through programs focused more generally on increasing preparedness for bioterrorism and other emerging infectious disease health threats. Federal officials have implemented and expanded syndromic surveillance systems in order to detect outbreaks more quickly, but there are concerns that these systems are costly to run and still largely untested. Federal officials have also implemented initiatives designed to improve public health communications and have undertaken initiatives intended to improve the coordination of zoonotic surveillance efforts. Current U.S. surveillance for identifying annual influenza outbreaks as well as an influenza pandemic involves multiple public health partners at all levels of government and relies on several data sources. At the federal level, CDC's Influenza Branch leads the national influenza surveillance effort, monitoring disease and viral trends using data submitted each week from October through May. These surveillance data are collected at the local and state levels and voluntarily submitted to CDC. Data submitted on influenza activity in the United States include data from more than 120 laboratories and 2,000 health care providers and mortality reports from 122 cities. In addition, influenza data are collected from all 50 state health departments and the health departments in the District of Columbia and New York City. CDC also receives data that are specifically focused on influenza in pediatric patients. When the data are used collectively, they provide a national picture of influenza activity. Specifically, they allow CDC to (1) identify when and where influenza activity is occurring, (2) determine what strains of the influenza virus are in circulation, (3) detect changes in the influenza virus, (4) monitor influenza-related illnesses, and (5) measure the impact influenza is having on deaths in the United States. DOD also plays a role in national and international influenza surveillance. Specifically, DOD's Influenza Surveillance Program, under the direction of the Air Force, collects viral specimens from its active duty personnel and their dependents at military facilities around the world. DOD's program also sends specimens to CDC for further analysis and contributes to the determination of which viral strains FDA includes in the nation's annual influenza vaccine. Internationally, DOD provides viral specimens to WHO and assists in identifying emerging influenza strains. In countries throughout the world, infectious disease surveillance is a national responsibility, but WHO assists its members' efforts through its Global Influenza Surveillance Network. WHO's Network is composed of 112 institutions, called National Influenza Centres, from 83 countries. Collectively, these Centres monitor influenza activity and annually gather more than 175,000 viral specimens for analysis from patients with influenza-like illnesses throughout the world. Selected influenza isolates-- an estimated 2,000 viruses--may also be sent to one of four WHO Collaborating Centres for further, more specific genetic analysis. The additional analysis conducted by the WHO Collaborating Centers is used for the annual WHO recommendations on which strains to include in the influenza vaccine for the northern and southern hemispheres. In addition to making recommendations on the components of the influenza vaccine, this Global Influenza Surveillance Network also serves as a global alert mechanism for the emergence of influenza viruses with pandemic potential. CDC has undertaken several initiatives that are intended to enhance influenza surveillance capabilities in preparation for an influenza pandemic. CDC works with its international partners to improve global surveillance for influenza. For example, CDC participates in international disease and laboratory surveillance sponsored by WHO. Also, when concerns were raised over recent influenza seasons that the avian influenza A (H5N1) could become the next influenza pandemic, CDC led a variety of efforts with its international partners to plan for and address threats of increased influenza activity worldwide. For example, CDC worked collaboratively with WHO to conduct investigations of avian influenza A in Vietnam and to provide laboratory testing. CDC also provided training assistance and has implemented an initiative to improve influenza surveillance in Asia. CDC also supports several domestic initiatives to improve surveillance capabilities for influenza. For example, CDC supports enhanced influenza surveillance activities through its Epidemiology and Laboratory Capacity (ELC) Grants. Established in 1997, this program provides funding to state and local influenza programs. Grants have steadily increased from the first awards in 1997, when less than $100,000 was provided to five states through August 2004, with funding totaling more than $2 million being given to about 47 states or major metropolitan areas. States and cities receiving ELC-influenza funding are encouraged to achieve three highlighted influenza epidemiology and laboratory surveillance capacities: sentinel physician surveillance, viral isolation and subtyping, and year- round surveillance. Each state targets funding to meet one or more of these three priorities and uses funding for support of improvements that include the assignment or hiring of an influenza coordinator, recruitment of sentinel physicians to collect influenza specimens and report influenza- like illness to the state, laboratory infrastructure enhancements to increase influenza testing capabilities for viral isolation and subtyping, and expansion of influenza surveillance activities to year-round. In an effort to enhance the ability to detect infectious disease outbreaks, particularly in their early stages, federal funding has supported state efforts to implement numerous syndromic surveillance systems. These systems collect information on syndromes from a variety of sources. For example, the National Retail Data Monitor (NRDM) collects data from retail sources instead of hospitals. As of February 2004, NRDM collected sales data from about 19,000 stores, including pharmacies, in order to monitor sales patterns in such items as over-the-counter influenza medications for signs of a developing infectious disease outbreak. CDC is taking steps to enhance its two public health communications systems, the Health Alert Network (HAN) and the Epidemic Information Exchange (Epi-X), which are used in disease surveillance and response efforts. For example, CDC is working to increase the number of HAN participants who receive assistance with their communication capacities. In addition, following reports of human deaths from avian influenza A in Vietnam in August 2004, CDC issued a HAN message reiterating criteria for domestic surveillance, diagnostic evaluation, and infection control precautions. CDC also issued detailed laboratory testing procedures for avian influenza through HAN. Similarly, CDC has expanded Epi-X by giving officials at other federal agencies and departments, such as DOD, the ability to use the system. CDC is also adding users to Epi-X from local health departments, giving access to CDC staff in other countries, and making the system available to Field Epidemiology Training Programs (FETP) located in 21 countries. Finally, CDC is facilitating Epi-X's interface with other data sources by allowing users to access the Global Public Health Intelligence Network (GPHIN), the system that searches Web-based media for information on infectious disease outbreaks worldwide. In addition to the efforts to enhance communication systems, federal public health officials also have enhanced federal coordination for zoonotic disease surveillance and expanded training programs. According to CDC, nearly 70 percent of emerging infectious disease episodes during the past 10 years have been zoonotic diseases. Moreover, recent outbreaks of human disease caused by avian influenza strains in Asia and Europe highlight the potential for new strains to be introduced into the population. Surveillance for zoonotic diseases requires collaboration between animal and human disease specialists. CDC, USDA, and FDA have made efforts to enhance their coordination of zoonotic disease surveillance. For example, CDC and UDSA are working with two national laboratory associations to add veterinary diagnostic laboratories to the Laboratory Response Network (LRN). As of May 2004, 10 veterinary laboratories had been added to LRN, and CDC officials told us that they had plans to add more veterinary laboratories in the future. In addition, CDC officials told us the agency has appointed a staff person whose responsibility, in part, is to assist in finding ways to enhance zoonotic disease coordination efforts among federal agencies and departments and with other organizations. This person is helping CDC develop a working group of officials from CDC, USDA, and FDA to coordinate zoonotic disease surveillance. According to CDC officials, the goal of this working group is to explore ways to link existing surveillance systems to better coordinate and integrate surveillance for wildlife, domestic animal, and human diseases. CDC officials also said that the agency is exploring the feasibility of a pilot project to demonstrate this proposed integrated zoonotic disease surveillance system. In addition, USDA officials told us that they hired 23 wildlife biologists in fall 2003 to coordinate disease surveillance, monitoring, and management activities among USDA, CDC, states, and other federal agencies. While each of these initiatives is intended to enhance the surveillance of zoonotic diseases, each is still in the planning stage or the very early stages of implementation. USDA also conducts influenza surveillance in domestic animals. Coordination with USDA is important because a pandemic strain is likely to arise from genetic mixing of animal and human influenza viruses. Recent outbreaks in domestic poultry in Asia and Europe associated with cases of human disease highlight the importance of coordinating surveillance activities. Surveillance for influenza viruses in poultry in the United States has increased substantially since the outbreak of highly pathogenic avian influenza (HPAI) in Pennsylvania and surrounding states in 1983 and 1984. However, individual states are generally responsible for the development and implementation of surveillance programs that are consistent with the size and complexity of the resident poultry industry. Challenges regarding the nation's preparedness for and response to an influenza pandemic remain. Specifically, our prior work has found that although CDC participated in an interagency working group that developed the U.S. plan for pandemic preparedness that was posted for public comment in August 2004, as of May 23, 2005, the plan had not been finalized. Further, we found that the draft plan does not address certain critical issues, including how vaccine for an influenza pandemic will be purchased, distributed, and administered; how population groups will be prioritized for vaccination; what quarantine authorities or travel restrictions may need to be invoked; and how federal resources should be deployed. At the state level, we found that most hospitals across the country lack the capacity to respond to large-scale infectious disease outbreaks. In August 2004, HHS released its national pandemic influenza plan for comment. The draft "Pandemic Influenza Preparedness and Response Plan" describes HHS's role in coordinating a national response to an influenza pandemic and provides guidance and tools to promote pandemic preparedness planning and coordination at the federal, state, and local levels, including both the public and the private sectors. However, as of May 23, 2005, this document remained in draft form. Further, although the plan is comprehensive in scope, it leaves many important decisions unresolved about the purchase, distribution, and administration of vaccines. For example, some decisions yet to be made include determining the public- versus private-sector roles in the purchase and distribution of pandemic influenza vaccines; the division of responsibility between the federal government and the states for vaccine distribution; and how population groups will be prioritized and targeted to receive limited supplies of vaccines. Until these key decisions are made, public health officials at all levels may find it difficult to plan for an influenza pandemic, and the timeliness and adequacy of response efforts may be compromised. The draft plan does not establish a definitive federal role in the purchase and distribution of vaccines during an influenza pandemic. Instead, HHS provides options for vaccine purchase and distribution that include public- sector purchase and distribution of all pandemic influenza vaccine; a mixed public-private system where public-sector supply may be targeted to specific priority groups; and maintenance of the current largely private system. In its draft plan, HHS does not recommend a specific alternative. Furthermore, the draft plan delegates to the states responsibility for distribution of vaccine. The lack of a clearly defined federal role in distribution complicates pandemic planning for the states. Furthermore, among the current state pandemic influenza plans, there is no consistency in terms of their procurement and distribution of vaccine and the relative role of the federal government. Approximately half of the states handle procurement and distribution of the annual influenza vaccine through the state health agency. The remainder either operate through a third-party contractor for distribution to providers or use a combination of these two approaches. Challenges persist in ensuring an adequate and timely influenza vaccine supply. The number of producers remains limited, and the potential for manufacturing problems such as those experienced during the 2004-2005 influenza season is still present. When one manufacturer's production is affected, providers who order vaccine from that manufacturer can experience shortages, while providers who receive supplies from another manufacturer may have all the vaccine they need. The allocation plan CDC developed for this past season's shortage was dependent upon voluntary compliance by the private sector and individuals to forgo vaccination. Most annual influenza vaccine distribution and administration are accomplished within the private sector, with relatively small amounts of vaccine purchased and distributed by CDC or by state and local health departments. In the United States, 85 percent of vaccine doses are purchased by the private sector, such as private physicians and pharmacies. HHS has not yet determined how influenza vaccine will be distributed and administered during an influenza pandemic. There are many issues surrounding the production of influenza vaccine, which will only become exacerbated during an influenza pandemic. Vaccines, which are considered the first line of defense to prevent or reduce influenza-related illness and death, may be unavailable or in short supply. Producing the vaccine is a complex process that involves growing viruses in millions of fertilized chicken eggs. Experience has shown that the vaccine production cycle takes at least 6 to 8 months after a virus strain has been identified, and vaccines for some influenza strains have been difficult to mass-produce, causing further delay. The lengthy process for developing a vaccine may mean that a vaccine would not be available during the initial stages of a pandemic. Vaccine shortages during the 2004-2005 influenza season have highlighted the fragility of the influenza vaccine market and the need for its expansion and stabilization. Currently, only two manufacturers are licensed to sell their vaccine in the United States. Maintaining an influenza vaccine supply is critically important for protecting the public's health and improving our preparedness for an influenza pandemic. As a result, according to CDC officials, the agency plans to alleviate the impact of next year's influenza season by taking aggressive steps to ensure an expanded influenza supply to protect the nation. To this end, the agency's fiscal year 2006 budget request includes an increase of $30 million for CDC to enter into guaranteed purchase contracts with vaccine manufacturers to ensure the production of bulk monovalent influenza vaccine. If supplies fall short, this bulk product can be turned into a finished trivalent influenza vaccine product for annual distribution. If supplies are sufficient, the bulk vaccine can be held until the following year's influenza season and developed into vaccines if the circulating strains remain the same. In addition, according to CDC, this guarantee will help to expand the influenza market by providing an incentive to manufacturers to expand capacity and possibly encourage additional manufacturers to enter the market. In addition, the fiscal year 2006 budget request includes an increase of $20 million to support influenza vaccine purchase activities. Even if sufficient quantities of the vaccine are produced in time, vaccines against various strains differ in their ability to produce the immune response necessary to provide effective protection against the disease. Studies show that it is uncertain how effective a vaccine will be in preventing or controlling the spread of a pandemic influenza virus. Early in an influenza pandemic, especially before a vaccine is available or during a period of limited vaccine supply, use of antiviral drugs may have a significant effect. Specifically, antiviral drugs can help prevent or mitigate the number of influenza-related deaths until an influenza vaccine becomes available. They can be used against all strains of pandemic influenza and have immediate availability as both a prophylactic to prevent illness and as a treatment if administered within 48 hours of the onset of symptoms. According to HHS, analysis is ongoing to define optimal antiviral use strategies, potential health impacts, and cost-effectiveness of antiviral drugs in the setting of a pandemic. The United States has a limited supply of influenza antiviral medications stored for an influenza pandemic. HHS officials expect the amount produced will be below demand during a pandemic. This assumption, supported by drug manufacturers, is based on the fact that current production levels of antiviral drugs are set in response to current demand, whereas demand in a pandemic is expected to increase significantly if vaccines are unavailable. In addition, the production of antiviral medications cannot be rapidly expanded and involves a long production process. Moreover, sometimes influenza virus strains can become resistant to one or more of the four approved influenza antiviral drugs, and thus the drugs may not always work. For example, the influenza A (H5N1) viruses identified in human patients in Asia in 2004 and 2005 have been resistant to two of the four antiviral drugs, amantadine and rimantadine. Another challenge in responding to an influenza pandemic involves implementing certain control measures to prevent the spread of the disease. These control measures--case identification and contact tracing, transmission control, and exposure management--are well-established and have proved effective in both health care and community settings. However, federal attempts to limit the spread of SARS into the United States by advising passengers who traveled to infected countries faced multiple obstacles. For example, due to airline concerns over authority and privacy, as well as procedural constraints, CDC was unable to obtain passenger contact information it needed to trace travelers. Although HHS has statutory authority to prevent the introduction, transmission, or spread of communicable diseases from foreign countries into the United States, HHS regulations implementing the statute do not specifically provide for HHS to obtain passenger manifests or other passenger contact information from airlines and shipping companies for disease outbreak control purposes. A challenge identified during the SARS outbreak that may also affect response efforts during an influenza pandemic is lack of sufficient hospital and workforce capacity. This lack could be exacerbated during an influenza pandemic, compared to other natural disasters, such as a tornado or hurricane, or an intentional release of a bioterrorist agent, because it is likely that a pandemic would result in both widespread and sustained effects. Public health officials we spoke with said a large-scale outbreak, such as an influenza pandemic, could strain the available capacity of hospitals by requiring entire hospital sections (along with their staff) to be used as isolation facilities. As we have reported earlier, most states lack "surge capacity," that is, the capacity to respond to the large influx of patients that could occur during a large public health emergency. For example, few states reported that they had the capacity to evaluate, diagnose, and treat 500 or more patients involved in a single incident. In addition, few states reported having the capacity to rapidly establish clinics to immunize or provide treatment to large numbers of patients. Moreover, a shortage in workforce could increase during an influenza pandemic because higher disease rates could result in high rates of absenteeism among health care workers who are likely to be at increased risk of exposure and illness. There are a number of systems in place to identify influenza outbreaks abroad, to alert us to a pandemic, and these systems generally appear to be working well. HHS has taken important steps to enhance surveillance and to fund initiatives for preparedness and response, including steps to increase the vaccine supply. However, important challenges remain in our preparedness to respond, should an influenza pandemic occur in the United States. The steps HHS is taking to address vaccine production capacity and stockpiling of antiviral drugs may not be in place in time to fill the current gaps in preparedness should an influenza pandemic occur in the next several years. As we learned in the 2004-2005 influenza season, problems affecting even a single manufacturer can produce major shortages. Once a pandemic influenza strain is identified, a vaccine will take many months to produce, and our current stockpile of antiviral drugs is insufficient to meet the likely demand. Pandemic influenza would have major impacts on the ability of communities to respond, businesses to function, and public safety to be maintained when communities across the country are simultaneously impacted and hospital capacity is overwhelmed. Since 2000, we have been urging the department to complete its pandemic plan. A draft plan was issued in August 2004, with a 60-day period for public comment, but as of this week, the plan had not been finalized. It is important for the federal government and the states to work through issues such as how vaccine will be purchased, distributed, and administered, how population groups will be prioritized for vaccination, what quarantine authorities or travel restrictions may need to be invoked, and how federal resources should be deployed before we are in a time of crisis. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or other Members of the Subcommittee may have at this time. For further information about this testimony, please contact Marcia Crosse at (202) 512-7119. Gloria E. Taylor, Gay Hee Lee, Elizabeth T. Morrison, and Roseanne Price made key contributions to this statement. Emergng Infecious Diseases: Revew of Sate and Federal Disease Surveillance Effors. GAO-04-877. Washington, D.C.: September 30, 2004. t nectous Disease Preparedness: Federal Chalenges in Responding to I f i Influenza Outbreaks. GAO-04-1100T. Washington, D.C.: September 28, 2004. Emergng Infecious Diseases: Asian SARS Outbreak Challenged I tnernational and Natonal Responses. GAO-04-564. Washington, D.C.: i April 28, 2004. Publc Heath Preparedness: Response Capac y mproving, bu Much t Remains to Be Accomp shed. GAO-04-458T. Washington, D.C.: February 12, 2004. Infectious Diseases: Gaps Remain in Survei ance Capabil ies o State and Local Agences. GAO-03-1176T. Washington, D.C.: September 24, 2003. i Severe Acute Respiraory Syndrome: Estabished Infectious Dsease Control Measures Helped Contain Spread, But a Large-Scale Resurgence May Pose Challenges. GAO-03-1058T. Washington, D.C.: July 30, 2003. SARS Outbreak: Improvemens to Pub c Health Capacity Are Needed for Responding o Bioerrorism and Emergng Infectous Diseases. GAO-03-tti 769T. Washington, D.C.: May 7, 2003. Infectious Disease Outbreaks: Bioterrorism Preparedness Efforts Have Improved Pub c HealhResponse Capacty, but Gaps Reman. GAO-03-t liii 654T. Washington, D.C.: April 9, 2003. Global Healh: Chalenges in Improving Infectious Disease Surve ance Systems. GAO-01-722. Washington, D.C.: August 31, 2001. Flu Vaccine: Steps Are Needed to Better Prepare for Possible Future Shortages. GAO-01-786T. Washington, D.C.: May 30, 2001. Flu Vaccne: Supply Probems Heighen Need o Ensure Access for High Risk People. GAO-01-624. Washington, D.C.: May 15, 2001. nluenza Pandemic: Pan Needed for Federal and State Response. GAO- I f 01-4. Washington, D.C.: October 27, 2000. l West Nile Virus Outbreak: Lessons for Pubic Healh Preparedness. GAO/HEHS-00-180. Washington, D.C.: September 11, 2000. Global Health: Framework for Infectious Disease Surveillance. GAO/NSIAD-00-205R. Washington, D.C.: July 20, 2000. 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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Vaccine shortages and distribution problems during the 2004-2005 influenza season raised concerns about the nation's ability to respond to a worldwide influenza epidemic--or influenza pandemic--which many experts believe to be inevitable. Some experts believe that the next pandemic could be spawned by the recurring avian influenza in Asia. If avian influenza strains directly infect humans and acquire the ability to be readily transmitted between people, a pandemic could occur. Modeling studies suggest that its effect in the United States could be severe, with one estimate from the Centers for Disease Control and Prevention (CDC) ranging from 89,000 to 207,000 deaths and from 38 million to 89 million illnesses. GAO was asked to discuss surveillance systems in place to identify and monitor an influenza pandemic and concerns about preparedness for and response to an influenza pandemic. This testimony is based on GAO's 2004 report on disease surveillance; reports and testimony on influenza outbreaks, influenza vaccine supply, and pandemic planning that GAO has issued since October 2000; and work GAO has done in May 2005 to update key information. Federal public health officials plan to rely on the nation's existing influenza surveillance system and enhancements to identify an influenza pandemic. CDC currently collaborates with multiple public health partners, including the World Health Organization (WHO), to obtain data that provide national and international pictures of influenza activity. Federal public health officials and health care organizations have undertaken several initiatives that are intended to enhance influenza surveillance capabilities. While some of these initiatives are focused more generally on increasing preparedness for bioterrorism and other emerging infectious disease health threats, others have been undertaken in preparation for an influenza pandemic. For example, in response to concerns over the past few years about the potential for avian influenza to become the next influenza pandemic, CDC implemented an initiative in cooperation with WHO to improve influenza surveillance in Asia. CDC has also implemented initiatives to improve the communications systems it uses to collect and disseminate surveillance information. In addition, CDC, the Department of Agriculture, and the Food and Drug Administration have made efforts to enhance their coordination of surveillance efforts for diseases that arise in animals and can be transferred to humans, such as SARS and certain strains of influenza with the potential to become pandemic. While public health officials have undertaken several initiatives to enhance influenza surveillance capabilities, challenges remain with regard to other aspects of preparedness for and response to an influenza pandemic. In particular, the Department of Health and Human Services (HHS) has not finalized planning for an influenza pandemic. In 2000, GAO recommended that HHS complete the national plan for responding to an influenza pandemic, but the plan has been in draft format since August 2004. Absent a completed federal plan, key questions about the federal role in the purchase, distribution, and administration of vaccines and antiviral drugs during a pandemic remain unanswered. Other challenges with regard to preparedness for and response to an influenza pandemic exist across the public and private sectors, including challenges in ensuring an adequate and timely influenza vaccine and antiviral supply; addressing regulatory, privacy, and procedural issues surrounding measures to control the spread of disease, for example, across national borders; and resolving issues related to an insufficient hospital and health workforce capacity for responding to a large-scale outbreak such as an influenza pandemic.
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As of September 30, 1997, the Navy reported that the value of its inventory was $16.8 billion. The Naval Supply Systems Command (NAVSUP) administers the Navy supply system and provides in-transit inventory management policies and procedures. The Command, through its NAVICP,initiates purchases and directs inventory movement for its customers. Until the inventory reaches its intended destination, NAVICP refers to it as in transit. The major categories of in-transit inventory are as follows: Warehoused material--material redistributed between storage activities, broken items shipped from Navy consolidation points to a commercial or other military service repair facility, and material returned from a commercial or other military service repair facility or an end user. Purchased material--new material shipped from a commercial source to a storage activity. End-user material--material ordered from a storage activity or commercial source by a unit that expects to use it. The Navy is required to use a variety of inventory tracking procedures to monitor shipment and receipt of in-transit items. Although the specific procedures for each major category have some differences, they all have three common control elements. First, the recipient of the material is responsible for notifying the NAVICP once the item has been received. This notification is an internal control designed to account for all in-transit assets. Second, if within 45 days of shipment NAVICP has not been notified that a shipment has arrived, it is required to follow up with the intended recipient. The rationale behind this requirement is that until receipt is confirmed, the exact status of the shipment is uncertain and therefore vulnerable to fraud, waste, and abuse. Third, the Navy is required to oversee in-transit inventory to assess the effectiveness of policies and procedures governing that inventory. Appendix II contains additional details on the receipt acknowledgment and follow-up procedures for in-transit items. Implementing inventory controls is a shared responsibility of the NAVICP and shipping and receiving activities, which include Defense Logistics Agency (DLA) and Navy-managed activities, and repair facilities. The Navy reported that it was unable to account for substantial amounts of in-transit inventory. This inventory is vulnerable to theft or loss and could cause managers to implement inefficient, ineffective decisions and practices regarding purchases. Between October 1995 and September 1998, the Navy reported that it wrote off as lost in-transit inventory valued at over $3 billion. Our analysis of financial reports showed that NAVICP Philadelphia was responsible for about $2.5 billion, or 84 percent, of these losses. Figure 1 summarizes the value of in-transit inventory losses by inventory control point. The Navy's in-transit inventory losses may be greater than the Navy recognizes because of uncertainties about the status of shipments to end users that did not have a corresponding notification of receipt. Figure 1 does not include any unaccounted for shipments to end users. For example, as we reported in February 1998, DOD did not have receipts for about 60 percent of its 21 million shipments to end users in fiscal year 1997. Among the DOD components, the Navy was responsible for over one-third of DOD's 21 million shipments and almost one-half of DOD's 12.4 million unacknowledged receipts (valued at $11.7 billion). Our review of 30,314 lost warehoused shipments (representing 132,793 items worth $753 million) at NAVICP Philadelphia in fiscal year 1997 showed that over 8,000 shipments contained military technology that needed to be protected. Classified and sensitive items included aircraft-guided missile launchers, military night vision devices, and communications equipment. Moreover, some shipments reported as lost included pilferable items such as radio sets and radar transmitters that have a ready resale value or civilian application and are therefore especially subject to theft. Although not categorized by DOD as pilferable, the lost items also included such items as video recorders and generators. Figure 2 summarizes the items lost in transit by security classification and figure 3 shows the items' value. Naval Supply Systems Command and NAVICP Philadelphia officials pointed out that in-transit losses for high-dollar items have declined from $1.2 billion to $600 million over the past 3 fiscal years but acknowledged that in-transit inventory continues to be a primary concern. According to these officials, in some instances the reported in-transit inventory losses might have resulted from accounting adjustments and, as such, were not real losses. They further stated that in most cases, the reported losses occurred because activities involved in the movement, repair, and storage of in-transit items did not (1) notify NAVICP Philadelphia that they shipped or received items as required by Navy regulations or (2) respond to follow-up inquiries made by NAVICP Philadelphia. However, as we note in the following section, our review of lost in-transit sample items revealed that the failure to comply with procedures for controlling in-transit inventory did not stop with the issuing, shipping, and receiving activities and did not result from accounting adjustments as Navy officials asserted. As a result of several significant control weaknesses, the Navy's in-transit inventory is highly vulnerable to fraud, waste, and abuse. First, end users have not routinely reported receipt of items to the NAVICP. Second, the integrated accounting and logistics systems that tie the Navy's accounting systems to its in-transit inventory tracking systems have not been effective. Third, NAVICP Philadelphia and its issuing activities, intended recipients, and commercial carriers have not adequately investigated cases in which warehoused material was not acknowledged as received. Fourth, NAVICP Philadelphia has not monitored the receipt of purchased material from commercial sources. Fifth, NAVSUP and NAVICP Philadelphia have not provided adequate oversight and monitoring of in-transit inventory. End users have not routinely reported receipt of items to NAVICP Philadelphia. For a 1-year period ending in May 1998, NAVICP Philadelphia closed the records for over $743 million in shipments that did not have a notification of receipt and had been outstanding for over 90 days. The NAVICP transfers accountability of material when it issues a release order to a DOD storage activity to ship the material and then to customers when they receive the material. End users are required by DOD policy to record receipts of material and notify the appropriate inventory control point within 5 calendar days (either electronically or by mail). We judgmentally selected for review 92 reported end-user shipments (valued at $5.2 million) whose receipt, according to NAVICP Philadelphia records, had not been acknowledged. We sought to determine whether those shipments had in fact been received and reported to NAVICP Philadelphia. According to NAVICP Philadelphia officials, 51 of the 92 shipments (valued at over $566,000) were to storage activities and had been incorrectly shown as end-user shipments. Thus, the records of the shipments should not have been closed by the NAVICP Philadelphia automated tracking system for end-user receipts. We then reviewed the status of these 51 shipments in the warehoused material receipt tracking system. NAVICP Philadelphia and the intended recipient were unable to provide evidence that four shipments had been delivered or received. The remaining 47 shipments had been received. Of the remaining 41 shipments (valued at $4.7 million), we determined that 28 (valued at $3.3 million) had in fact been received and accounted for, but the receipt acknowledgments had not been sent to NAVICP Philadelphia. According to one Defense Automated Addressing System (DAAS) Office official, the end users' receipt acknowledgment codes were obsolete. Consequently, DAAS did not forward the acknowledgments to NAVICP Philadelphia. When we informed end-user officials that their acknowledgment codes were obsolete, they said that the Navy had not yet changed its reporting systems and procedures to conform with DOD's changes in the codes. Our review also showed other shortcomings in the execution of in-transit control policies and procedures for the remaining 13 shipments. For example: One shipment valued at $606,330 was assumed by NAVICP Philadelphia to have been received by the end user but was never shipped by the depot. Twelve shipments valued at $737,986 had been received by the end user but were not reported to NAVICP Philadelphia. End-user officials said that their automated logistics system is not designed to acknowledge material receipt. However, DOD policy states that if the reporting activity cannot transmit receipt electronically, it should prepare a manual material receipt acknowledgment and mail the form directly to the inventory control point. Because of poorly integrated accounting and logistics systems, the Navy may have written off as lost millions of dollars of warehoused material shipments that had actually been received and accounted for by NAVICP Philadelphia and in DAAS historical records. Navy policy for following up on in-transit material states that the NAVICP should search its internal files for delinquent receipts of warehoused material shipments. Delinquent shipments, according to Navy policy, should be written off as inventory losses if their receipts remain unconfirmed after 6 months or 11 months, depending on their value. According to Navy policy, shipments of consumable items, depot-level reparable items, and appropriated purchases valued at less than $2,500, $15,000, and $20,000, respectively, should be written off as inventory losses if their receipts remain unconfirmed after 6 months. All other shipments require external follow-up and should be written off as lost if their receipts remain unconfirmed after 11 months. At NAVICP Philadelphia, 15 (16 percent) of the 94 warehoused shipments that we sampled were written off as lost despite the fact that their receipts were recorded in NAVICP Philadelphia's internal files and DAAS historical records 6 months to 1 year in advance of the date they were written off. These discrepancies reduce the reliability of inventory financial reports, which thus obscure true inventory losses, such as those resulting from theft or loss, and misstate the number of items on hand. We informed NAVICP Philadelphia officials that their internal and DAAS history files contained receipts for 15 warehoused shipments that were written off as lost. They said that in 11 cases, they had not accurately identified these receipts because the Navy's general ledger system, which ties its accounting systems to its logistics and other key management systems and is used to identify the receipt of shipments, did not update both accounting and logistics records with the in-transit inventory receipts. In the other four cases, the receiving activities did not correctly enter receipt data into the logistics system; thus, the NAVICP's integrated systems showed that the items were not received. NAVSUP officials said that until the planned resystemization of its databases is complete, NAVICP Philadelphia would need to rely on the Navy's general ledger system to identify the receipt of shipments. Our prior reports have pointed out deficiencies in DOD's existing accounting and related systems, including its logistics systems. Although Navy policy requires external follow-up of unconfirmed receipts of warehoused material over a certain dollar threshold, NAVICP Philadelphia has not adequately followed up or resolved such receipts. According to Navy policy, the NAVICP should first seek proof of shipment from the issuing activity on shipments of consumable items, depot-level reparable items, and appropriated purchases valued at more than $2,500, $15,000, and $20,000, respectively, within 45 days from the date the material was issued. After obtaining that information, the NAVICP should seek proof of delivery from the shipping carrier. Navy policy, however, does not set a specific time limit for replies from issuing activities, shipping carriers, and intended recipients. We sampled 17 warehoused shipments (valued at $2.3 million) that required external follow-up. For these shipments, NAVICP Philadelphia officials explained that commercial carriers, storage activities, and repair contractors did not respond to their follow-up requests and the shipments were later written off as lost. However, our review showed that 2 of the 17 shipments (valued at $215,760) were erroneously written off as lost but in reality had been acknowledged as received and accounted for in NAVICP inventory records. For the remaining 15 shipments (valued at $2,085,200), NAVICP did not follow up when receipts were not returned. Specifically, in 6 of the 15 shipments (valued at $910,600) NAVICP Philadelphia did not adequately follow up for proof of shipment, delivery, or receipt with the appropriate activities. For three other shipments (valued at $479,040), the carriers did not respond to NAVICP's requests for proof of delivery, and NAVICP did not initiate claims against the carriers. For five shipments (valued at $647,230), the storage or repair activity did not respond to NAVICP's requests for proof of receipt. NAVICP Philadelphia officials could not explain what happened to the remaining shipment (valued at $48,330) and could not provide documentation that they had followed up on the shipment to account for its loss. The following two examples illustrate how the inadequate follow-up and resolution of overdue shipments results in reported in-transit losses of material. In September 1996, the Defense Distribution Depot in Norfolk, Virginia, issued 24 generators (valued at $212,640) to a commercial carrier for shipment to a commercial repair contractor. According to NAVICP Philadelphia officials, the repair contractor did not acknowledge receipt of the material. Over 90 days later, in December 1996, the NAVICP requested proof of issuance from the Norfolk depot, which the depot provided in January 1997. In February 1997, the NAVICP sought proof of delivery from the carrier, which did not confirm delivery. NAVICP officials said they did not initiate a claim against the carrier. The material was later written off as an in-transit loss. In October 1995, the Norfolk depot reportedly issued 29 aircraft guided-missile launchers (valued at over $181,830) to the Fleet and Industrial Supply Center in San Diego, California. According to NAVICP Philadelphia officials, the Center did not acknowledge receiving the equipment. In February 1996, NAVICP sought proof of issuance from the Norfolk depot, which it provided in April 1996. NAVICP Philadelphia officials said that they then unsuccessfully sought proof of receipt from the Center from April to October 1996, when the items were written off as lost. NAVICP Philadelphia has not monitored the receipt of purchased material from commercial sources. Under Navy policy, NAVICP must follow up with the appropriate depot on receipts for purchased material 45 days from the date of the shipment, and the depot must respond to NAVICP on the status of the shipments. However, NAVICP Philadelphia officials told us that they neither monitor shipments nor follow up on delinquent receipts. These officials said they were unaware that NAVICP was required to initiate follow-up on delinquent receipts. During our review, NAVICP Philadelphia reported that in-transit purchased material totaled over $75 million, of which $4.8 million in material had been in transit for over 1 year. We judgmentally selected and reviewed records for 28 shipments (valued at about $1 million) with outstanding purchased material balances over 1 year old and found the following: Eight shipments (valued at $172,099) had been sent from commercial vendors to end users over 1 year earlier, but NAVICP Philadelphia officials had not attempted to follow up on delinquent receipt notifications to determine whether the shipments had been received. NAVICP Philadelphia's automated records indicated that six shipments of purchased material (valued at $343,679) were in transit, but in fact there were no such shipments. Instead, expenses of $343,679 had been incurred to terminate the six contracts erroneously processed as outstanding purchased material. According to Navy officials, the Defense Finance Accounting Service disbursement system does not distinguish between material and termination settlement payments, both of which accrue purchased material. One shipment (valued at $26,566) reflected outstanding purchased material in NAVICP Philadelphia's automated financial records, but the amount was in fact for internally generated progress payment expenditure corrections. NAVICP Philadelphia's automated records indicated that two shipments of purchased material (valued at $38,750) were in transit, but in actuality $38,750 was the difference between the estimated and final contract cost of the two shipments. Eleven shipments (valued at $438,395) were received, but one of NAVICP Philadelphia's automated inventory records was not updated to reflect the status of these shipments. According to NAVICP Philadelphia officials, receipts for the shipments were processed in their automated contract status file but were not reflected in the procurement obligation status file. Consequently, the established procurement remained on the NAVICP's file as outstanding purchased material. No effort had been made to reconcile these 11 inconsistencies. In May 1990, we reported discrepancies between NAVICP Philadelphia's purchased material shipment records and receipt records, a condition that may adversely affect procurement decisions. We further reported that these discrepancies indicated inadequate internal controls over procured assets and did not provide NAVICP Philadelphia with reasonable assurance that its procurement system was adequately protected from waste, fraud, and abuse. In addition, the NAVICP Philadelphia, in its fiscal years 1995-98 management control reviews, cited ongoing problems with the systems used to track purchased material. NAVSUP and NAVICP Philadelphia have not always monitored warehoused material receipt and follow-up efforts as required by Navy policy. The policy requires periodic reviews of in-transit inventory losses to highlight breakdowns in the physical distribution process and assist the NAVICP in monitoring its performance. These reviews are also designed to give NAVSUP a means of assessing the effectiveness of its policies and procedures for governing in-transit inventory. Although NAVICP Philadelphia compiles summary data on in-transit inventory losses, its officials responsible for inventory accuracy acknowledged that they do not compile data that identifies the predominant causes, sources, and magnitude of in-transit inventory losses, even though the compilation of such information is required by Navy policy. The lack of this information impede's the Navy's ability to determine which activities are responsible for lost or misplaced items. NAVSUP officials acknowledged that they had not actively monitored in-transit inventory receipt and follow-up efforts but had recently begun to review both systems and processes to correct weaknesses. The Federal Managers' Financial Integrity Act of 1982 requires that agency heads provide an annual statement to the President and Congress on whether their agency's internal control systems comply with the internal control objectives of the act. If the agency head decides that agency systems do not comply, a report identifying material weaknesses involved and the plans and schedules for correcting the weaknesses must be submitted with the statement. The statement is also to include a report on whether the agency's accounting system conforms to the Comptroller General's standards. However, the Navy did not identify significant weaknesses in internal controls over NAVICP's in-transit inventory in its Financial Integrity Act statements over the past 3 years, despite the fact that it had written off as lost inventory valued at more than $3 billion. Moreover, the Navy has not established any performance measures, milestones, or timetables for reducing the risk of its in-transit inventory to undetected theft or misplacement. The weaknesses in the Navy's internal controls over in-transit inventory undermine its ability to measure its progress toward achieving the goals set out in DOD's recent Performance Plan, covering fiscal year 1999, prepared in response to the requirements of the Government Performance and Results Act. DOD's plan calls for improving asset visibility in such areas as in-transit assets and sets up the goal to achieve 90-percent visibility over material by 2000. Current Navy internal controls over in-transit inventory do not provide a reliable means to establish visibility. Our review of items that the Navy had reported as being lost in transit indicated that at least some had in fact been acknowledged as received. In other cases, Navy officials wrote off in-transit inventory items because they did not know whether the items had been stolen or otherwise lost. In other words, they did not have adequate visibility over them. The lack of adequate internal controls undermines the Navy's ability to do its part in helping DOD achieve a 90-percent visibility rate over inventories by 2000 and reduce inventories by 2003. The lack of controls may also limit the ability of DOD and Navy officials to effectively manage the movement of material and to make sound decisions about redistributing items rather than buying new items or optimizing the positioning of stock. DOD is also required by the Strom Thurmond National Defense Authorization Act for Fiscal Year 1999 to develop a comprehensive plan to ensure visibility over in-transit secondary items. For secondary items, the law requires that DOD's plan address such issues as the vulnerability of in-transit items to loss through fraud, waste, and abuse; loss of oversight of in-transit items, including items transported by commercial carriers; and loss of accountability over in-transit items due to either a delay of delivery of the items or a lack of notification of the delivery. The act called for DOD to submit its plan to Congress by March 1, 1999. However, on March 4, 1999, DOD informed Congress that additional time was necessary to prepare the plan due to, among other things, the broad scope of the requirement and the need to thoroughly study our findings on in-transit inventory. DOD stated that it intended to submit a comprehensive plan to Congress by September 1, 1999. The Navy has not effectively controlled its in-transit inventory, leaving significant amounts of inventory unaccounted for. Significant weaknesses exist at all levels of the Navy's in-transit inventory management structure. These weaknesses lead to potential theft or undetected losses of items and demonstrate inefficient and ineffective logistics management practices such as potentially shipping or buying unnecessary inventory. These weaknesses and the problems they create are primarily a result of the failure of the Navy to follow its own policies and procedures regarding controls of in-transit inventory. Further, significant problems exist in data reporting systems. In conjunction with developing a statutorily required, comprehensive plan to address visibility over in-transit inventory, DOD should take a number of immediate steps to improve controls over the Navy's in-transit inventory. Specifically, we recommend that the Secretary of Defense direct the Secretary of the Navy to do the following: Comply with existing DOD and Navy procedures regarding material receipt acknowledgment of in-transit shipments and reemphasize follow-up procedures on unconfirmed warehoused and purchased material receipts. Modify the Navy's integrated accounting and logistics systems so that they routinely update both financial and inventory records when in-transit inventory items are received. Until the systems are operational, NAVICP Philadelphia should establish routine reconciliation procedures for their supply and financial records to ensure oversight and control over in-transit inventory items. Specifically target in-transit inventory problems as an issue for review in Federal Managers' Financial Integrity Act assessments. Establish performance measures, milestones, and timetables to help monitor the progress being made to reduce the vulnerability of in-transit inventory to undetected loss or misplacement. In written comments on a draft of this report, DOD agreed with all of our recommendations and stated that the Navy had taken immediate steps to improve in-transit inventory. The Commander, Naval Supply Systems Command, has chartered an Integrated Process Team to review current systems, policies, and processes to investigate material receipt acknowledgment problems and proposed short-term solutions. The Commander has also chartered a team to review in-transit practices of the other services and of commercial activities in order to reengineer the in-transit process. The Naval Inventory Control Point will include in-transit inventory accounting as part of its fiscal year 1999 management control evaluation of internal controls and report material weaknesses to NAVSUP by August 1, 1999. DOD further stated that the Commander, Naval Supply Systems Command, will establish performance measures and a plan of action and milestones to monitor progress being made to reduce the loss or misplacement of shipments. Although DOD agreed with our recommendations, it stated that initial research of the $3 billion in Navy inventory written off as lost supports its belief that most of the material was actually received. A DOD official later said that DOD's belief was based on its review of 410 lost warehoused material shipments at NAVICP Philadelphia in fiscal year 1997. According to the official, DOD found that 327 (80 percent) of the 410 shipments had been written off as lost even though they had been received. However, our review at NAVICP Philadelphia indicated a different relationship between shipments later accounted for and those actually lost. Our review showed that 15 (16 percent) of the 94 warehoused shipments we sampled were written off as lost despite the fact that their receipts were recorded and that the Navy, after further investigation, could not account for the whereabouts of the remaining 79 shipments. Although some of the items reported as lost may actually be in the inventory, DOD does not have an adequate system for determining that on an item-by-item basis. Therefore, we continue to believe a significant number of items are vulnerable to undetected theft or loss. Moreover, until this situation is resolved, these discrepancies reduce the reliability of DOD inventory financial reports, thus obscuring true inventory losses and misstating the number of items on hand. We believe that the Navy's planned and ongoing initiatives to address its in-transit inventory deficiencies are a step in the right direction. However, in conjunction with the steps taken to improve controls over the Navy's in-transit inventory, DOD needs to develop its plan for in-transit inventory and bring it to fruition. DOD has recently indicated that it will take an additional 6 months to develop the statutorily required, comprehensive plan for its in-transit inventory. Because the act calls for us to review the DOD plan and implementation, we will continue to monitor DOD's efforts to develop its overall plan and be in a position to assess its implementation. Appendix I contains the scope and methodology for this report, and appendix II contains additional details on Navy procedures for acknowledging and following up on receipts of in-transit inventory. DOD's written comments on this report are reprinted in their entirety in appendix III. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to Senator Daniel K. Inouye, Senator Joseph I. Lieberman, Senator Carl Levin, Senator Ted Stevens, Senator Fred Thompson, and Senator John Warner and to Representative Rod R. Blagojevich, Representative Dan Burton, Representative Jerry Lewis, Representative John P. Murtha, Representative Christopher Shays, Representative Ike Skelton, Representative Floyd Spence, and Representative Henry A. Waxman in their capacities as Chair or Ranking Minority Member, Senate and House Committees and Subcommittees. We are also sending copies of this report to The Honorable William S. Cohen, Secretary of Defense; The Honorable Richard Danzig, Secretary of the Navy; Lieutenant General Henry T. Glisson, Director, DLA; and The Honorable Jacob J. Lew, Director, Office of Management and Budget. Copies will also be made available to others upon request. Please contact me at (202) 512-8412 if you have any questions. The major contributors to this report are listed in appendix IV. Our objectives for this report were to (1) identify the reported value and types of inventory in transit within and between storage and repair activities, vendors, and end users that were unaccounted for (or lost) and (2) assess the Navy's adherence to procedures for controlling such in-transit inventory. To assess the Navy's procedures for controlling in-transit inventory and identify the reported types and amounts of in-transit items that were not accounted for, we took the following steps: We reviewed policies and procedures and obtained other relevant documentation related to in-transit inventory from officials at the Defense Logistics Management Standards Office, McLean, Virginia; the Defense Automated Addressing System Office, Dayton, Ohio; and the Naval Supply Systems Command (NAVSUP), Mechanicsburg, Pennsylvania. We obtained financial reports of in-transit losses between October 1995 and September 1998 at NAVSUP. Using the financial reports, we identified the Naval Inventory Control Point (NAVICP) Philadelphia as the Navy's inventory control activity with the highest reported dollar value of in-transit inventory losses. At NAVICP Philadelphia, we obtained computerized inventory and financial records of in-transit losses between October 1996 and September 1997, the most current and complete in-transit information available. Using the data, we judgmentally selected and reviewed 214 shipments of warehoused, purchased, and end-user material, valued at $9 million, that were reported as lost or not received. We did not independently verify the overall accuracy of NAVICP Philadelphia's databases from which we obtained data but used them as a starting point for selecting shipments that we then tracked back to records and documents on individual transactions. For each sample shipment, we reviewed available computer-generated shipment and receipt data, analyzed inventory records, and held discussions at the NAVICP Philadelphia, Pennsylvania; the Defense Distribution Depot, Fleet and Industrial Supply Center, Norfolk Naval Air Station, Norfolk, Virginia; and Oceana Naval Air Station, Virginia Beach, Virginia. To learn whether issues associated with overdue shipments were adequately resolved, we reviewed Department of Defense, Navy, and NAVICP Philadelphia implementing guidance. Such information provided the basis for conclusions regarding the controls over in-transit inventory. To determine whether the Navy had emphasized in-transit inventory as part of its assessment of internal controls, we reviewed assessments from NAVICP Philadelphia for fiscal years 1995-97 and Navy Headquarters for fiscal years 1995-97. We performed our review between February 1998 and January 1999 in accordance with generally accepted government auditing standards. Figure II.1 shows the procedures the Navy is to follow to acknowledge receipts and to follow up on delinquent receipts for shipments of material to end users, figure II.2 shows these procedures for shipments of warehoused material, and figure II.3 shows the procedures for shipments of purchased material. Reports receipt? Reports receipt? Issuing Activity Storage activity Repair activity of issue? Receiving Activity Storage activity Repair facility Reports receipt? Identifies receipt? Reports receipt? Reports receipt? (No procedures) Performance and Accountability Series: Major Management Challenges and Program Risks--Department of Defense (GAO/OCG-99-4, Jan. 1999). Department of Defense: Financial Audits Highlight Continuing Challenges to Correct Serious Financial Management Problems (GAO/T-AIMD/NSIAD-98-158, Apr. 16, 1998). Department of Defense: In-Transit Inventory (GAO/NSIAD-98-80R, Feb. 27, 1998). Inventory Management: Vulnerability of Sensitive Defense Material to Theft (GAO/NSIAD-97-175, Sept. 19, 1997). High-Risk Series: Defense Inventory Management (GAO/HR-97-5, Feb. 1997). High-Risk Series: Defense Financial Management (GAO/HR-97-3, Feb. 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 reviewed selected aspects of the Navy's management procedures for controlling items in transit, focusing on the: (1) reported value and types of inventory in transit within and between storage and repair activities, vendors, and end users that were unaccounted for (or lost); and (2) Navy's adherence to procedures for controlling such in-transit inventory. GAO noted that: (1) the Navy has not effectively controlled its in-transit inventory and places enormous amounts of inventory at risk of undetected theft or misplacement; (2) for fiscal years 1996-1998, the Navy reported that it had lost over $3 billion in in-transit inventory, including some classified and sensitive items such as aircraft guided-missile launchers, military night vision devices, and communications equipment; (3) the Navy's Inventory Control Point (NAVICP) at Philadelphia, which manages the largest portion of the Navy's inventory, reported the largest losses--$2.5 billion, or 84 percent of the Navy's in-transit losses; (4) however, GAO's work showed that a few of the items reported as lost by NAVICP Philadelphia had in fact been accounted for in inventory records; (5) Navy activities involved in issuing and receiving inventory items have not always followed the Navy's control procedures to ensure that in-transit items are accounted for; (6) Navy units have not always reported to NAVICP Philadelphia that they received requested items; (7) ineffective accounting systems have been used to monitor receipts of items redistributed between storage activities, shipped to and from repair facilities, and shipped from end users; (8) NAVICP Philadelphia and its shipping and receiving activities have not adequately investigated unreported receipts of items redistributed between storage activities, shipped to and from repair facilities, and shipped from end users; (9) NAVICP Philadelphia has not monitored receipts of items it purchased from commercial sources; (10) as early as 1990, GAO reported that there were indications of inadequate internal controls over procured assets; (11) Naval Supply Systems Command and NAVICP Philadelphia oversight of in-transit inventory has not been adequate; (12) although Navy officials have initiated actions intended to correct the problems GAO cited, the Navy has not established any performance measures, milestones, or timetable for reducing the vulnerability of in-transit inventory to theft or loss; and (13) the Navy has not identified management of in-transit inventory as a significant weakness in its assessments of internal controls, as provided in the Federal Managers' Financial Integrity Act of 1982.
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Based on federal managers' responses on our four governmentwide surveys conducted over the past 10 years, performance planning and measurement have slowly, yet increasingly, become a part of agencies' cultures. In particular, as shown in figure 1, significantly more federal managers today report having the types of performance measures called for by GPRA and PART than they did 10 years ago. However, unless federal managers use performance data to make management decisions and to inform policymakers, the benefit of collecting performance information cannot be realized and real improvement in management and program results are less likely to be achieved. We have found that despite having more performance measures, the extent to which managers make use of this information to improve performance has remained relatively unchanged. As shown in figure 2, seven of the nine categories of management activities we asked about showed no significant change over the past 10 years. In particular, despite efforts through GPRA and PART to help government better inform resource allocation decisions with performance information, over the past decade, there has been no significant shift in the percent of managers reporting they use information obtained from performance measurement when allocating resources. In addition, contract management remains the management activity with the least reported use of performance information, despite recommendations for better management of federal contracts from Congress and GAO and efforts to improve contract management through the PMA Competitive Sourcing Initiative. In 2007, 41 percent of managers reported that they use performance information when developing and managing contracts, a 3 percentage point increase from 2000, when we first asked the question. Given the growing fiscal imbalance, the government must get the best return it can on its investment in goods and services by improving its development, management, and assessment of contracts; using performance information in these activities can help to focus contract management on results. Of interest, there were two areas relating to managers' use of performance information in management decision making that did change significantly between 1997 and 2007. First, there was a significant decrease in the percentage of managers who reported that their organizations used performance information when adopting new program approaches or changing work processes. Performance information can play a valuable role in highlighting the need to take a closer look at the effectiveness of existing approaches and processes. Such an examination could lead to identifying needed changes to bring about performance improvements. Second, there was a significant increase in the percentage of managers who reported that they reward the employees they manage or supervise based on performance information. We believe this is an important development that can play a role in getting managers to pay attention to their performance; we will discuss this in more detail later in this statement. While in general there has been little change in federal managers' reported use of performance information governmentwide, agency level comparisons between 2000 and 2007 reveal that some agencies have made notable progress. For example, over the last 7 years, the Nuclear Regulatory Commission (NRC) showed a significant increase in positive responses to eight questions related to use of performance information in management activities. At the same time, DOD showed no change in their responses to questions related to the use of performance information and the Small Business Administration (SBA) reported significantly lower use of performance in 2007 than 2000 on two questions. As seen in table 1, the range of use also varied considerably among agencies with Forest Service (FS) and Department of the Interior (Interior) managers among the lowest users, and the Social Security Administration (SSA) and National Aeronautics and Space Administration (NASA) among the highest. The PART has been used by the current administration to increase the government's focus on improving program performance results. Specifically, OMB includes an assessment of whether programs use performance information for program management as one element of its overall program assessment. In judging agency progress on the Performance Integration Initiative of the PMA, OMB also considers whether PART findings and performance information are used consistently to justify funding requests, management actions, and legislative proposals. However, of the federal managers familiar with PART, a minority--26 percent--indicated that PART results are used in management decision making, and 14 percent viewed PART as improving performance. As our survey results show, despite legislative and administration efforts to focus federal management decisions on the achievement of results and maximize the use of federal funds, changing the way federal managers make decisions is not simply a matter of making program performance information available. Based on our work on management reform efforts as well as analysis of federal managers' responses to our surveys over the past 10 years, we have identified three key practices that can contribute to greater attention to results when making management decisions. Regardless of the form of future initiatives, the next administration should take steps to ensure that agencies emphasize these practices to make sure that performance information is used in management decision making: 1. demonstrate leadership commitment to results-oriented management; 2. create a clear "line of sight" linking individual performance with 3. build agency capacity to collect and use performance information. Perhaps the single most important element in successfully implementing organizational change is the demonstrated, sustained commitment of top leaders. Leaders can demonstrate their support for results-oriented management and facilitate the use of performance information by agency managers through frequent and effective communication of performance information. On our survey, we found a positive relationship between agency managers who reported that performance information is effectively communicated on a routine basis and managers' reported use of performance information in key management activities--in other words, greater communication of performance information is associated with greater use. Leaders can communicate performance information in their organizations by promoting the use of visual tools such as poster displays, performance scorecards, and intranet sites. In prior reviews, officials have told us that publicizing performance information can inspire a greater sense of ownership on the part of employees in their unit's performance; it can also spur competition between units. Additionally, we found that frequently reporting performance information can help to identify program problems before they escalate, identify the factors causing the problems, and modify services or processes to try to address problems. Leaders can play a key role in this process by following up on problems identified during discussions of performance information and by holding managers accountable for addressing the problems. From 1997 to 2007, we saw a significant increase in the percent of managers--from 57 to 67 percent---who reported that top leadership demonstrates a strong commitment to achieving results (see fig. 3.). Our survey results confirm the relationship between leadership commitment to results-oriented management and managers' reported use of performance information in key management activities, such as developing program strategy and making decisions about funding or allocating resources. Similarly, managers who believed their immediate supervisor paid attention to the use of performance information in decision making also perceived that managers at their level made greater use of performance information. Regarding the contribution of PART to improving this practice, 37 percent of federal managers familiar with PART reported that upper management has paid greater attention to performance and achieving results. More than any other items we asked about concerning the effect of PART, this item received the greatest degree of endorsement from federal managers. To be successful, governmentwide performance improvement initiatives must ensure that all employees involved in the process understand the rationale for making the changes and their role and responsibility in the process. Performance management systems are a vital tool for managing and directing such organizational transformations because they create a "line of sight" showing how team, unit, and individual performance can contribute to overall organizational results. Additionally, performance management systems can be used to hold employees accountable for achieving and incorporating results into management and employee decision making. Over the past 10 years, we found positive trends in federal managers' responses to several questions relating to how agencies are managing their employees, which agencies can build upon to further emphasize the importance of managing by results (see fig. 4.). Specifically, we saw a statistically significant increase--from 53 percent in 1997 to 61 percent in 2007--in the percentage of federal managers that reported using performance information when rewarding government employees they manage. Additionally, a significantly higher number of federal managers reported that employees in their agency receive positive recognition for helping the agency accomplish its strategic goals from 1997 to 2007. At the same time, an increasing portion of senior executives report they are being held more accountable for results. In recent years, Congress and the administration modernized the performance appraisal and pay systems for senior executives by requiring a clearer link between individual performance and pay. Specifically, agencies are allowed to raise Senior Executive Service (SES) base pay and total compensation caps if their performance appraisal systems are certified by the Office of Personnel Management (OPM) with concurrence by the Office of Management and Budget (OMB) as, among other things, linking performance for senior executives to the organization's goals and making meaningful distinctions based on relative performance. In our past work on performance management and pay issues, we have reported that performance-based pay cannot be simply overlaid on most organizations' existing performance management systems. Rather, as a precondition to effective pay reform, individual expectations must be clearly aligned with organizational results, communication on individual contributions to annual goals must be ongoing and two-way, meaningful distinctions in employee performance must be made, and cultural changes must be undertaken. Most important, leading organizations have recognized that effective performance management systems create a "line of sight" showing how unit and individual performance can contribute to overall organizational goals and can help them drive internal change and achieve external results. Effective performance-management systems that hold executives accountable for results can help provide continuity during times of leadership transition, such as the upcoming change in the administration, by maintaining a consistent focus on organizational priorities. Interestingly, since our 2003 survey, SES responses regarding accountability show a significant increase. Between 2003 and 2007, there was a 14 percentage point increase in the number of SES who responded that managers/supervisors at their level are held accountable for accomplishment of agency strategic goals. In 2007, there was a 12 percentage point increase in the number of SES who reported that they are held accountable for the results of the programs, operations, or projects for which they are responsible as compared to 2003 (see fig. 5.). There was no significant change in responses from 2003 to 2007 in non- SES level responses to either of these questions. As we have previously reported, it is important to ensure that managers have the authority to implement changes to the programs for which they are held accountable. Our 2007 survey results, however, indicate a growing gap between senior executives' perceptions of their accountability for program performance as opposed to their decision- making authority (see fig. 6). In 2007, 81 percent of senior executives reported that they are held accountable for the results of the programs for which they are responsible, while 62 percent reported that they have the decision-making authority they need to help the agency achieve its strategic goals, a 19 percentage point difference. Managers' ability to effect change within their organization is limited if they do not have the decision- making authority to help the agency accomplish its strategic goals. While agencies can require managers to collect and report performance information, this does not ensure that managers have the knowledge or experience necessary to use the information or will trust the information they are gathering. The practice of building analytical capacity to use performance information and to ensure its quality--both in terms of staff trained to do the analysis and availability of research and evaluation resources--is critical to using performance information in a meaningful fashion and plays a large role in the success of government performance improvement initiatives. Managers must understand how the performance information they gather can be used to provide insight into the factors that impede or contribute to program successes; assess the effect of the program; or help explain the linkages between program inputs, activities, outputs, and outcomes. In earlier work, we found a positive relationship between agencies providing training and development on setting program performance goals and the use of performance information when setting or revising performance goals. While our survey found a significant increase in training since 1997, only about half of our survey respondents in 2007 reported receiving any training that would assist in strategic planning and performance assessment. We previously recommended that OMB ensure that agencies are making adequate investments in training on performance planning and measurement, with a particular emphasis on how to use performance information to improve program performance. However, OMB has not yet implemented our recommendation. In addition to building agency capacity by educating staff on how to use performance information, it is also important to ensure that the information gathered meets users' needs for completeness, accuracy, consistency, timeliness, validity, and ease of use. Our survey results indicate that those federal managers who felt they had sufficient information on the validity of the performance data they use to make decisions were more likely to report using performance information in key management activities. Interestingly, this question regarding managers' perception of the validity of performance data was more strongly associated with managers' reported use of performance information than it was with any other question on the survey. Additionally, we found a significant relationship between federal managers reporting that managers at their level are taking steps to ensure that performance information is useful and appropriate and their reported use of performance information in key management activities. Getting buy-in from managers by involving them in the selection and development of measures for their programs can help increase their confidence in the data collected and the likelihood that they will use the information gathered in decision making. Regardless of the form, future governmentwide initiatives to improve performance should take into consideration key lessons learned that we have identified through our work. First, the next administration should promote the three key practices we found that facilitate the use of performance information by all levels of agency management. Beyond this, the next administration can better focus its efforts to improve performance by (1) adopting a more strategic and crosscutting approach to overseeing performance; (2) improving the relevance of performance information to Congress; and (3) building agency confidence in assessments for use in decision making. Given the time and effort required to assess agency and program performance, taking a more crosscutting, strategic approach to such assessments may better use limited resources. Additionally, focusing decision makers' attention on the most pressing policy and program issues and on how related programs and tools affect broader outcomes and goals may better capture their interest throughout the process. The current administration's PART initiative focuses on individual programs, which aligns with OMB's agency-by-agency budget reviews, but has been used infrequently to address crosscutting issues or to look at broad program areas in which several programs or program types address a common goal. Crosscutting analysis looking at broad program areas is necessary to determine whether a program complements and supports other related programs, whether it is duplicative and redundant, or whether it actually works at cross-purposes to other initiatives. While OMB has reported on a few crosscutting assessments in recent budget requests, we have suggested that OMB adopt this approach more widely and develop a common framework to evaluate all programs--including tax expenditures and regulatory programs--intended to support common goals. We have previously reported GPRA could provide OMB, agencies, and Congress with a structured framework for addressing crosscutting program efforts. OMB, for example, could use the provision of GPRA that calls for OMB to develop a governmentwide performance plan to integrate expected agency-level performance. Unfortunately, this provision has not been implemented fully. OMB issued the first and only such plan in February 1998 for fiscal year 1999. Without such a governmentwide focus, OMB is missing an opportunity to assess and communicate the relationship between individual agency goals and outcomes that cut across federal agencies and more clearly relate and address the contributions of alternative federal strategies. The governmentwide performance plan also could help Congress and the executive branch address critical federal performance and management issues, including redundancy and other inefficiencies in how the government does business. It could also provide a framework for any restructuring efforts. In addition to the annual performance plan, a governmentwide strategic plan could identify long-term goals and strategies to address issues that cut across federal agencies. Such a plan for the federal government could be supported by a set of key national outcome-based indicators of where the nation stands on a range of economic, environmental, safety/security, social, and cultural issues. A governmentwide strategic plan combined with indicators could help in assessing the government's performance, position, and progress, and could be a valuable tool for governmentwide reexamination of existing programs, as well as proposals for new programs. Further, it could provide a cohesive perspective on the long- term goals of the federal government and provide a much needed basis for fully integrating, rather than merely coordinating, a wide array of federal activities. In order for performance improvement initiatives to hold appeal beyond the executive branch, and to be useful to the Congress for its decision making, garnering congressional buy-in on what to measure and how to present this information is critical. In a 2006 review, congressional committee staff told us that although OMB uses a variety of methods to communicate the PART assessment results, these methods cannot replace the benefit of early consultation between Congress and OMB about what they consider to be the most important performance issues and program areas warranting review. However, a mechanism to systematically incorporate a congressional perspective and promote a dialogue between Congress and the President in the PART review process is missing. As a result of this lack of consultation, there have been several areas of disagreement between OMB and Congress about this executive branch tool, resulting in most congressional staff we spoke with not using the PART information. Most congressional staff reported that they would more likely use the PART results to inform their deliberations if OMB (1) consulted them early in the PART process regarding the selection and timing of programs to assess, (2) explained the methodology and evidence used or to be used to assess programs, and (3) discussed how the PART information can best be communicated and leveraged to meet their needs. OMB has recently taken some steps to more succinctly report agency performance information. In 2007, OMB initiated a pilot program that explores alternative approaches to performance and accountability reporting, including a "highlights report" summarizing key performance and financial information. However, more work could be done to better understand congressional information needs and communication preferences. We have reported previously that congressional staff appreciate having a variety of options for accessing the information they need to address key policy questions about program performance or to learn about "hot" issues. In a case study we conducted on FAA's communication of performance, budgeting, and financial information with Congress, congressional committee staff from the House Transportation and Infrastructure Committee were interested in better using technology to gain additional agency data in a timely manner. For example, staff reported that agencies could create a For Congress page on their Web site dedicated to serve as a single repository of data for congressional requesters. In future initiatives, OMB could explore alternative communication strategies and data sources to better meet congressional needs and interest and ensure that the valuable data collected for performance improvement initiatives is useful and used. Additionally, Congress could consider whether a more structured oversight mechanism is needed to permit a coordinated congressional perspective on governmentwide performance issues. Just as the executive branch needs a vehicle to coordinate and address programs and challenges that span multiple departments and agencies, Congress might need to develop structures and processes that better afford a coordinated approach to overseeing agencies and tools where jurisdiction crosses congressional committees. We have previously suggested that one possible approach could involve developing a congressional performance resolution identifying the key oversight and performance goals that Congress wishes to set for its own committees and for the government as a whole. Such a resolution could be developed by modifying the annual congressional budget resolution, which is already organized by budget function. This may involve collecting the input of authorizing and appropriations committees on priority performance issues for programs under their jurisdiction and working with crosscutting committees such as the Senate Committee on Homeland Security and Governmental Affairs, the House Committee on Oversight and Government Reform, and the House Committee on Rules. This year, Congress issued its budget resolution for fiscal year 2009 containing a section directing Committees of the House of Representatives and the Senate to review programs' performance within their jurisdiction for waste, fraud, and abuse and report recommendations annually to the appropriate Committee on the Budget. As the primary focal point for overall management in the federal government, OMB plays a critical role in the planning and implementation of the President's initiatives. During the current administration, OMB has reported that is has reviewed over 1,000, or 98 percent, of all federal programs through its PART initiative. Moreover, through its PMA and PART initiatives, OMB has set the tone of leadership at the top by holding agencies accountable for their implementation of recommendations intended to improve program management. However, regardless of the mechanism that the next administration employs to oversee agency and program performance, OMB's efforts could be enhanced by building agency confidence in the credibility and usefulness of its assessments for management decision making. To build this confidence, OMB could further its efforts to increase OMB examiners' knowledge of the programs they are assessing and agency knowledge about how to develop and use the information gathered for PART. Our survey results indicate that concerns exist among federal managers regarding the quality of OMB's assessments. Specifically, managers responding to our survey expressed concerns that OMB examiners may be spread too thinly and do not have sufficient knowledge of the programs they are reviewing necessary for accurate assessments. On our survey, the suggested improvement to PART with the highest level of endorsement from federal managers familiar with PART was to ensure that OMB's examiners have an in-depth knowledge of the programs they review. Seventy percent of respondents indicated that this was a high to very high priority for improving PART. For example, one respondent told us that "the PART reviewer does not have time to try to understand program" and another stated that "some PART reviewers are not familiar with their agency mission and scope." These responses echo previous statements officials have given us regarding PART, in particular that PART assessments can be thoughtful when OMB is knowledgeable about a program and has enough time to complete the reviews, but that assessments are less useful when OMB staff are unfamiliar with programs or have too many PART assessments to complete. By taking a more targeted, strategic approach as we previously recommended, OMB could allow examiners time to conduct more in-depth assessments of selected programs and build their knowledge base about the programs. OMB can also help to facilitate implementation of future initiatives by offering training to agency officials on the reporting requirements of the initiatives and how the information gathered for these efforts might be incorporated into management decision making. As we previously mentioned, it is important to build agency capacity in terms of the capability of staff to analyze and use performance information in their decision making. Nearly half of managers familiar with PART indicated that agency-level training on developing acceptable performance measures for PART as well as training on how to use performance measures identified as a result of the PART process should be high to very high priorities for improving PART. One survey respondent commented that "PART is a great concept but poorly understood by many in federal service; more training and interaction among managers [working on PART] could lead to substantial improvements in performance and overall efficiencies." Another survey respondent emphasized that training needed to be provided to field offices "so field supervisors and front-line employees understand how their work outcomes/outputs roll up to highest levels in government goals and initiatives." Building agency officials familiarity with and confidence in the performance assessments being conducted will be critical to improving the integration and use of the information gathered in management decision making. Each new administration has the opportunity to learn from and build upon the experiences of its predecessors. While the last decade has seen the creation of an infrastructure for government performance improvement efforts, and a more results-oriented culture in the federal government, we still see more that can be done to make this transformation more widespread among federal agencies. Adopting the key practices we have highlighted--demonstrating leadership commitment to performance, aligning individual performance with the goals of the organization, and building the capacity to use information--would be an important first step, and OMB can play an important role in fostering these practices across government. OMB could also adopt some of these practices in its own engagement with agencies--particularly, by helping to provide the training and development that both OMB analysts and agency program managers will need to make sure that any OMB-led performance review is useful and used. Beyond this, Congress and the administration can help bring a more strategic approach to how government performance is monitored and measured. As we have noted repeatedly in our work, a governmentwide strategic plan, underpinned by a set of key national indicators (KNI), would, in defining outcomes shared by multiple agencies and programs, help keep sight of how well agency programs are working collectively to produce intended results. Whatever performance improvement initiatives the next administration adopts, it will be vital to engage the Congress in helping to identify the meaningful measures of success, as well as the form in which performance information will be useful to Congress itself in carrying out its oversight, legislative, and appropriations roles. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions you or other members of the committee may have at this time. For further information on this testimony, please contact Bernice Steinhardt at (202) 512- 6806 or [email protected] Elizabeth Curda at (202) 512-4040 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Individuals making key contributions to this testimony were Matt Barranca, Thomas Beall, Laura Craig, Scott Doubleday, Daniel Dunn, Catherine Hurley, Stuart Kauffman, Alison Keller, Anna Maria Ortiz, Mark Ramage, Kaitlin Riley, Jerry Sandau, and Katherine Hudson Walker. A Web-based questionnaire on performance and management issues was administered to a stratified random probability sample of 4,412 persons from a population of approximately 107,326 mid-level and upper-level civilian managers and supervisors working in the 24 executive branch agencies covered by the Chief Financial Officers (CFO) Act of 1990. The sample was drawn from the Office of Personnel Management's (OPM) Central Personnel Data File (CPDF) as of March 2007, using file designators indicating performance of managerial and supervisory functions. In reporting the questionnaire data, when we use the term "governmentwide" and the phrase "across the federal government," we are referring to these 24 CFO Act executive branch agencies, and when we use the terms "federal managers" and "managers," we are referring to both managers and supervisors. The questionnaire was designed to obtain the observations and perceptions of respondents on various aspects of such results-oriented management topics as the presence and use of performance measures, hindrances to measuring performance and using performance information, and agency climate. In addition, the questionnaire included a section requesting respondents' views on the Office of Management and Budget's (OMB) Program Assessment Rating Tool (PART) and the priority that should be placed on various potential improvements to it. With the exception of the section of the questionnaire asking about OMB's PART, most of the items on the questionnaire were asked in three earlier surveys. The earliest survey was conducted between November 1996 and January 1997 as part of the work we did in response to a Government Performance and Results Act (GPRA) requirement that we report on implementation of the act. The second survey, conducted between January and August 2000, and the third survey, conducted between June and August 2003, were designed to update the results from each of the previous surveys. The 2000 survey, unlike the other two surveys, was designed to support analysis of the data at the department and agency level as well as governmentwide. Similar to the three previous surveys, this survey covered the CFO Act agencies and the sample was stratified by whether the manager or supervisor was Senior Executive Service (SES) or non-SES. The management levels covered general schedule (GS), general management (GM), or equivalent schedules at levels comparable to GS/GM-13 through career SES or equivalent levels of executive service. Similar to our 2000 and 2003 surveys, we incorporated special pay plans, for example, Senior Foreign Service executives, into the population and the sample to ensure at least a 90 percent coverage of all managers and supervisors at or comparable to the GS/GM-13 through career SES level at the departments and agencies we surveyed. One purpose of this survey was to update the information gathered at the departmental and agency level for the survey done in 2000. Similar to the design of the 2000 survey, stratification was also done by the 24 CFO Act agencies with an additional breakout of five selected agencies from their departments--Forest Service, Centers for Medicare and Medicaid Services (CMS), Federal Aviation Administration (FAA), Internal Revenue Service (IRS), and Federal Emergency Management Agency (FEMA). The first four agencies were selected for breakout in our 2000 survey on the basis of our previous work, at that time, identifying them as facing significant managerial challenges. FEMA, which was an independent agency at the time of our 2000 survey, became part of the Department of Homeland Security (DHS) when the department was created. The intent of this survey was to cover the same set of entities examined in the 2000 survey with the addition of DHS, which was created in 2003, in order to examine possible change in managerial perceptions of performance measurement and use over time at the department and agency level between 2000 and 2007. The PART section was included to obtain feedback from managers that would help inform the transition and management agenda of the next administration. Most of the items on the questionnaire were closed-ended, meaning that, depending on the particular item, respondents could choose one or more response categories or rate the strength of their perception on a 5-point extent scale ranging from "to no extent" at the low end of the scale to "to a very great extent" at the high end. For the PART questions about improvement priorities, the 5-point scale went from "no priority" to "very great priority." On most items, respondents also had an option of choosing the response category "no basis to judge/not applicable." We sent an e-mail to members of the sample that notified them of the survey's availability on the GAO Web site and included instructions on how to access and complete the survey. Members of the sample who did not respond to the initial notice were sent up to four subsequent reminders asking them to participate in the survey. The survey was administered from October 2007 through January 2008. During the course of the survey, we deleted 199 persons from our sample who had either retired, separated, died, or otherwise left the agency or had some other reason that excluded them from the population of interest. We received useable questionnaires from 2,943 sample respondents, or about 70 percent of the remaining eligible sample. The eligible sample includes 42 persons that we were unable to locate and therefore unable to request that they participate in the survey. The response rate across the 29 agencies ranged from about 55 percent to 84 percent. The overall survey results are generalizable to the population of managers as described above at the CFO Act agencies. The responses of each eligible sample member who provided a useable questionnaire were weighted in the analyses to account statistically for all members of the population. All results are subject to some uncertainty or sampling error as well as nonsampling error. As part of our effort to reduce nonsampling sources of error in survey results, we checked and edited (1) the survey data for responses that failed to follow instructions and (2) verified the programs used in our analyses. In general, percentage estimates in this report for the entire 2007 sample have confidence intervals ranging from about +1 to +6 percentage points at the 95 percent confidence interval. Percentage estimates in this report for individual agencies have confidence intervals that range from +3 to +18 percentage points. An online e-supplement GAO-08-1036SP shows the questions asked on the survey with the weighted percentage of managers responding to each item. As part of our analyses of the 2007 survey data, we identified a set of nine items from the questionnaire that inquired about uses of performance information that we identified in a previous GAO report. Using those items we developed an index that reflected the extent to which managers' perceived their own use of performance information for various managerial functions and decisions as well as that of other managers in the agency. To obtain this overall index score of reported use of performance information, we computed an average score for each respondent across the nine items we identified. By using this average index score, which yields values in the same range as the 5-point extent scale used on each item, we were able to qualitatively characterize index score values using the same response categories used for the items comprising the index. We refer to this index as the "core uses index" in that it indicates managers' perceptions about the extent to which performance information is used across a core set of management decision-making areas. Because a complex sample design was used in the current survey as well as the three previous surveys, and different types of statistical analyses are being done, the magnitude of sampling error will vary across the particular surveys, groups, or items being compared due to differences in the underlying sample sizes and associated variances. The number of participants in the current survey is slightly larger than the 2000 survey (2,510) and much larger than the 1996-1997 survey (905) and the 2003 survey (503), both of which were designed to obtain governmentwide estimates only. Consequently, in some instances, a difference of a certain magnitude may be statistically significant. In other instances, depending on the nature of the comparison being made, a difference of equal or even greater magnitude may not achieve statistical significance. We note throughout the report when differences are significant at the .05 probability level. Also, as part of any interpretation of observed shifts in individual agency response between the 2007 and the earlier 2000 survey, it should be kept in mind that components of some agencies and all of the Federal Emergency Management Agency (FEMA) became part of the Department of Homeland Security (DHS). We conducted our work from March 2007 to July 2008, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. 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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Over the past 15 years, legislative and executive branch reform efforts have attempted to shift the focus of federal government management from a preoccupation with activities to the results or outcomes of those activities. Based on over a decade of work in this area, GAO has found a transformation in the capacity of the federal government to manage for results, including an infrastructure of outcome-oriented strategic plans, performance measures, and accountability reporting that provides a solid foundation for improving the performance of federal programs. However, agencies have made less progress in getting their managers' to use performance information in their decision making. GAO was asked to testify on the preliminary results of ongoing work looking at (1) trends in federal managers' use of performance information to manage, both governmentwide and at the agency level; (2) how agencies can encourage greater use of performance information to improve results; and (3) lessons learned from prior management reforms for the next administration. Our statement is based on prior GAO reports and surveys we conducted in 1997, 2000, 2003, and 2007. For the results of our 2007 survey, see e-supplement GAO-08-1036SP . GAO will be issuing a report at a later date that will explore the use of performance results in management decision making at selected agencies. According to GAO surveys, since 1997 significantly more federal managers report having performance measures for the programs they manage. However, despite having more performance measures available, federal managers' reported use of performance information in management decision making has not changed significantly. For the collection of performance information to be considered more than meaningless paperwork exercises, it must be useful to and used by federal decision makers at all levels--including Congress. To reach this state, GAO believes that the next administration should promote three key practices that we have identified in our work over the last 10 years: (1) demonstrate leadership commitment to results-oriented management; (2) develop a clear "line of sight" linking individual performance with organizational results; and (3) build agency capacity to collect and use performance information. In addition to encouraging agencies to employ these practices, the next administration should: (1) adopt a more strategic and crosscutting approach to overseeing governmentwide performance; (2) improve the relevance of performance information to Congress; and (3) build agency confidence in assessments for use in decision making.
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Biennially, the Judicial Conference, the federal judiciary's principal policymaking body, assesses the judiciary's needs for additional judgeships. If the Conference determines that additional judgeships are needed, it transmits a request to Congress identifying the number, type (courts of appeals, district, or bankruptcy), and location of the judgeships it is requesting. The demands upon judges' time are largely a function of both the number and complexity of the cases on their dockets. Some types of cases may demand relatively little time, and others may require many hours of work. The federal judiciary has developed workload measures for bankruptcy judges to estimate the national average amount of a judge's time that different types of cases may require. Individual judges may actually spend more or less time than this average on specific cases within each type-- such as personal chapter 7 bankruptcy cases with assets of less than $50,000 or chapter 13 cases with liabilities of $50,000 or more (see app. II). In assessing the need for additional bankruptcy judgeships in a bankruptcy court, the Judicial Conference first considers the court's weighted case filings. The Judicial Conference has established 1,500 annual weighted case filings per authorized judgeship as an indicator of a bankruptcy court's potential need for additional judgeships. This represents about 1,500 annual hours of case-related judge time. The Conference's policy for assessing bankruptcy judgeship needs recognizes that judges' workloads may be affected by factors not captured in the bankruptcy-weighted case filings. Examples of such factors include historical caseload data and filing trends; geographic, economic, and demographic factors in the bankruptcy district; and the availability of alternative solutions and resources for handling a court's workload, such as assistance from judges outside the district. However, our analysis focused solely on the weighted case filings workload measure. Each case filed in a bankruptcy court is assigned a case weight. The case weight statistically represents the national average amount of judicial time, in hours, each type of bankruptcy case would be expected to require. The case weights are based on a 1988-1989 study in which bankruptcy judges completed diaries on how many hours they spent on specific types of cases and noncase-related work. Total annual weighted case filings for any specific bankruptcy court is the sum of the weights associated with each of the cases filed in the court in a year. Total annual weighted case filings per judgeship represent the estimated average amount of judge time that would be required to complete the cases filed in a specific bankruptcy court in a year. Weighted case filings per judgeship is the total weighted filings divided by the number of authorized judgeships. For example, if a bankruptcy court had 5,100 weighted case filings and three authorized judgeships, the weighted case filings per judgeship would be 1,700. Because this exceeds the 1,500 threshold, the Judicial Conference would consider this court for an additional judgeship. However, it should be noted that the Judicial Conference's policy is to consider additional judgeships only for those courts that request them. Thus, if a court would otherwise be eligible for an additional judgeship, but did not request one, the Judicial Conference would not request a judgeship for that court. The Federal Judicial Center (FJC) developed the weights, adopted by the Judicial Conference in 1991, based on a 1988-1989 time study in which 272 bankruptcy judges (97 percent of all bankruptcy judges in those years) recorded the time they spent on specific cases for a 10-week period. Unlike the District Court time study, whose goal was to follow each sample case from filing to disposition--a "case tracking" study--this study was a "diary study" in which judges recorded in a time diary the hours spent on each case in the study and for other judicial work for the 10-week period. This period of time may or may not have covered the entire life of the case from filing through disposition. Appendix III includes a more detailed comparison of case-tracking and diary time studies as methods of capturing judge time spent on specific cases. The case weights were developed using a two-step process. First, time data were collected from 272 judges (97 percent of the total of 280 bankruptcy judges at the time of the study). The judges recorded the time they spent on a sample of cases and other judgeship work over a 10-week period. The judges were subdivided into five groups and the recording time period for each group was staggered over a 1-year period. Second, the researchers assessed the relative impact on judicial workload of different types of cases--that is, which types of cases seemed to take more or less time--and developed individual case weights for specific case categories. The basic case weight computations involved calculating the average amount of time spent on cases of each type during each month of their life. These averages were then summed to determine the total amount of time for each case type. Once the case weights had been created, total weighted case filings were calculated for each bankruptcy court. Then, weighted caseloads were transformed into initial estimates of required judgeships. These initial estimates were adjusted to account for factors other than those covered by the case weight calculation, such as the court's case management practices and the time required to travel to divisional offices. After all adjustments, the study concluded that bankruptcy judges spent about 1,280 hours annually on direct case-related work and an average of 660 hours on matters not directly related to specific cases (e.g., on court and chambers administration, work-related travel, and other matters related to the judicial role). When it approved the case weights in 1991, the Judicial Conference stated that it expected that in addition to other judicial duties, a bankruptcy court should have at least 1,500 annual case-related hours per judgeship to justify additional judgeships. The federal work year is 2,080 hours per year, based on a 40-hour work week. Assuming that judges spent 1,500 hours annually on cases, there would remain 580 hours for federal holidays, annual leave, training, and noncase-related administrative tasks. Of course, the actual time that individual judges spend on case-related and non case-related work will vary. Overall, the methodology used to develop the bankruptcy case weights appears to be reasonable. The methodology included a valid sampling strategy, a very high participation rate among bankruptcy judges, and a reasonable means of adjusting for such factors as missing data. A notable strength of the methodology was the high participation rate by judges--97 percent of the bankruptcy judges at the time of the study. Thus, participating judges represented almost the entire universe of bankruptcy judges that could be included. The sampling period was not limited to a single time of year, thus minimizing potential bias due to variations in case filings by time of year. FJC researchers systematically used the reported time data to develop the case weights and made an effort to address all known limitations in the data. In computing the case weights, assumptions, and adjustments needed to be made to account for time data that were not linked to specific cases, missing data, and other factors. Both the assumptions and the methods used to make these adjustments appeared to be reasonable. It is important to note that the case weights were designed to estimate the impact of case filings on the workload of bankruptcy judges. Noncase-related time demands, such as time spent on court administration tasks, are not included in the case weights. The Judicial Conference focuses its analysis of the need for additional judges primarily on the demands that result from caseload, not noncase-related tasks and responsibilities. Potential limitations of the methodology included the possibility of judges using different standards and definitions to record their time. Although the judges had written instructions on how to record their time, judges may have varied in how they interpreted case-related and noncase-related hours. To the extent this occurred, it may have resulted in the recording of noncomparable time data among judges. Because some cases require longer calendar time to complete than others, not all cases in the sample were completed at the end of the 10 weeks in which judges recorded their time. In particular, the study captured only a small portion of the total time required for very large business bankruptcies. Where the cases were not completed, it was necessary to estimate the judge time that would have been required to complete the case. However, the method used to make these estimates was also reasonable. The size and time demands of chapter 11 business bankruptcies vary considerably. The bankruptcy case weights, which the Judicial Conference approved for use in 1991, included a weight of 11.234 hours for chapter 11 business filings involving $1 million or more and a weight of 4.021 hours for chapter 11 business filings with assets between $50,000 and $99,999. In 1996, a new method was used for measuring the workload required for very large ("mega") chapter 11 business cases. This measure was also developed by the FJC and approved by the Judicial Conference's Bankruptcy Committee. The mega cases were defined as "those involving extremely large assets, unusual public interest, a high level of creditor involvement, complex debt, a significant amount of related litigation, or a combination of such factors." The Administrative Office of the U.S. Courts defines mega chapter 11 cases as a single case or set of jointly administered or consolidated cases that involve $100 million or more in assets and 1,000 or more creditors. Mega chapter 11 cases are distinct from other large chapter 11 cases in that they generally involve a larger number of associated filings and extend over a longer period of time. The 1991 case weights did not fully reflect the judge time required for these very large, complex bankruptcy filings. The weighting scheme was a particular problem for the Southern District of New York and the District of Delaware, both of which have a high number of mega cases. At the time of the 1988-1989 bankruptcy time study, the highest value for chapter 11 cases in the bankruptcy administrative database was $1 million or more. Subsequently, changes were made to the database, which now includes several subcategories for cases above $1 million, the highest being $100 million and above. Also, the time study estimated the judge time required by cases for the first 22 months after the case was filed, a period which may not have encompassed the entire calendar time required to dispose of the case. Both of these factors contributed to the inability to create case weights for the mega chapter 11 cases. Beginning in 1996, the adjustment of weighted case filings to account for mega chapter 11 cases was implemented in the two districts where most of these cases have been filed--first in the Southern District of New York and later in the District of Delaware. FJC's research suggested there was no clear linear relationship between asset size and judge time in mega chapter 11 cases. Instead, FJC selected an adjustment method using data routinely collected on docketed events in bankruptcy cases, such as docketed hearings. The method used to adjust the case weights for mega chapter 11 cases consists of a preliminary weighted caseload computation, followed by a ratio adjustment step. The preliminary weighted caseload is the sum of the bankruptcy case weights for each case filing associated with the mega chapter 11 cases. For example, if a mega case consisted of two consolidated cases, one with assets of between $50,000 and $99,999 (weight: 4.021) and one with assets greater than $1 million (weight: 11.234), the preliminary case weight would be 15.255 (4.021 plus 11.234). In the Southern District of New York, this preliminary case weight is adjusted by the ratio of docketed events per weighted case-hour for mega chapter 11 cases to the docketed events per weighted case- hour for nonmega chapter 11 cases involving more than $1 million in assets. In the District of Delaware, where mega chapter 11 cases tended to have a larger number of consolidated filings, several ranges of the number of associated filings are used to classify mega chapter 11 cases. For each range, a separate docketing ratio adjustment is calculated in the same manner as it is for the District of Southern New York. In both districts, the final step is to report these calculations over a period of several years and use the average value across the years as the adjusted weighted caseload for mega chapter 11 cases. The purpose of this final step is to moderate the effect of fluctuations in the number of mega chapter 11 cases filed from year to year. The methodology used to adjust the weighted caseload for mega chapter 11 cases, specifically the ratio adjustment step, cannot be thoroughly assessed because there are no objective time data to use for comparison. The FJC selected this methodology after extensive research on other possible methods. The overall strategy of applying a ratio adjustment using auxiliary information, followed by use of a multiyear average, is a reasonable approach. In June 2002, the Judicial Conference Committee on the Administration of the Bankruptcy System decided to begin a study to create new bankruptcy case weights. The preliminary design for the study had a two-phase structure. In the first phase, a diary time study would be conducted, and the time study data would be used to develop new case weights. In the second phase, research was planned to assess the possibility of developing "event profiles" that would allow future updating of the weights without the necessity of conducting a time study for each update. Future updating of the weights could include revision of case weight values and/or developing case weights for new case categories. The data from the time study could be used to validate the feasibility of the new approach.The preliminary design for this study appeared to be reasonable. In the first phase, new weights would be constructed using objective data from the time study. The second part represented experimental research to determine if it would be possible to make future revisions to the weights without the requirement of conducting a time study. If the research determined this were possible, it would then be possible to update the case weights more frequently with less cost than required by a time study. If bankruptcy reform were enacted during the course of the new bankruptcy time study, FJC officials said they would recommend halting the time study and allowing some period of time for the implementation of the new law before restarting the study. This was a prudent plan because the law had many provisions affecting personal bankruptcy filings and personal bankruptcy filings represent the vast majority of bankruptcy filings. The FJC did begin collecting data for new case weights in 2005, but terminated the effort soon after the Bankruptcy Reform Act was enacted. It is possible, indeed likely, that the Bankruptcy Reform Act's many new provisions have affected the time that bankruptcy judges spend on cases. For example, there are new objections that can be filed that require hearings. These include a U.S. Trustee's objection to the debtor's exemption from credit counseling certification. Under the Bankruptcy Reform Act, debtors who file for bankruptcy are required to complete credit counseling prior to filing. The extent to which new provisions in the Bankruptcy Reform Act affect bankruptcy judges workload depends, of course, on the frequency with which they are invoked and the time it takes to address them. Although nonbusiness (personal) bankruptcy filings accounted for more than 96 percent of total bankruptcy filings both before and after the implementation of the Bankruptcy Reform Act, the Act initially had a dramatic effect on bankruptcy filings. Total personal bankruptcy filings in 2004 were 1,563,145 and in calendar years 2005 were almost a half million higher at 2,039,214. By contrast, in calendar year 2006, the first full calendar year after the Bankruptcy Reform Act became effective, personal bankruptcy filings were 597,965--a drop of about 71 percent compared to 2005 filings and about 62 percent compared to 2004 filings. Personal bankruptcy filings have since grown to 1,153,412 in the 12 month period ending March 31, 2009. Thus, it was prudent for the FJC to suspend its 2005 time study because it would likely take some time for the filings under the new law to normalize, and there would inevitably be issues about the law's implementation that would need to be addressed. The FJC has again initiated a new case weight study that includes data collected over 5 10-week reporting periods from May 2008 through May 2009. This study, like its predecessors, is a time study in which participating bankruptcy judges record the time they spend on cases and other judicial activities during their assigned reporting period. Each active and recalled bankruptcy judge is to participate during one of the 5 reporting periods. The FJC has dropped the second part of the 2002 design, which was to collect assess whether an event-based approach could be used to more frequently update the case weights. The FJC said that the experience in the 2005 study indicated that the supplemental information about judges' time reports--which was very detailed and keyed to specific case events--was the most burdensome to provide. These data elements were not included in the 2008 study in order to simplify the process, reduce the burden on judges, and contribute to keeping judges' participation rate in the 2008 study high, since 125 judges had already participated in the 2005 study and would be asked again to participate in the 2008 study. Moreover, the FJC said that the information from the suspended 2005 study provides the necessary foundation for the exploratory work on the event-based method, which the FJC still intends to do Mr. Chairman, this concludes my prepared statement, I would be pleased to respond to any questions that you or other members of the Subcommittee may have. For further information regarding this testimony, please contact William Jenkins, Jr., at (202) 512-8777. Individuals making key contributions to this testimony included David Alexander, Leyla Kazaz, and Geoffrey Hamilton. All current records related to bankruptcy filings that are reported to the Administrative Office of the U.S. Courts and used for the bankruptcy court case weights are generated by the automated case management systems in the bankruptcy courts. Filings records are generated monthly and transmitted to AOUSC for inclusion in its national database. On a quarterly basis, AOUSC summarizes and compiles the records into published tables, and for given periods, these tables serve as the basis for the weighted caseload determinations. In responses to written questions, AOUSC described numerous steps taken to ensure the accuracy and completeness of the filings data, including the following: Built-in, automated quality control edits are done when data are entered electronically at the court level. The edits are intended to ensure that obvious errors are not entered into a local court's database. Examples of the types of errors screened for are the district office in which the case was filed, the U.S. Code title and section of the filing, and the judge code. Most bankruptcy courts have staff responsible for data quality control. A second set of automated quality control edits are used by AOUSC when transferring data from the court level to its national database. These edits screen for missing or invalid codes that are not screened for at the court level, such as dates of case events, the type of proceeding, and the type of case. Records that fail one or more checks are not added to the national database and are returned electronically to the originating court for correction and resubmission. Monthly listings of all records added to the national database are sent electronically to the involved courts for verification. Courts' monthly and quarterly case filings are monitored regularly to identify and verify significant increases or decreases from the normal monthly or annual totals. Tables on case filings are published on the Judiciary's intranet for review by the courts. Detailed and extensive statistical reporting guidance is provided to courts for reporting bankruptcy statistics. This guidance includes information on general reporting requirements, data entry procedures, and data processing and reporting programs. Periodic training sessions are conducted for bankruptcy court staff on measures and techniques associated with data quality control procedures. In addition to the quality control procedures listed above, AOUSC indicated that an audit was performed in 1997 by Clifton Gunderson L.L.C., a certified public accounting firm, to test the accuracy of the bankruptcy statistical data maintained by bankruptcy courts and the AOUSC. The firm compared individual case records in 11 courts nationwide with data in the national database for cases filed in 1993, 1994, and 1995 for completeness and accuracy. Excluding problems in one district, the overall match rate of all statistical data elements captured exceeded 97 percent, and the fields with most mismatches were not relevant to the bankruptcy weighted caseload. AOUSC was unaware of any other efforts to verify the accuracy electronic data to "hard copy" case records for bankruptcy courts. AOUSC noted that it did not have time to seek detailed information from the individual bankruptcy courts on this issue within the short time available to respond to our questions. The current Bankruptcy Court and District Court workload measures were developed using data collected from time studies. The District Court time study took place between 1987 and 1993, and the Bankruptcy Court time study took place between 1988 and 1989. Different procedures were used in these two time studies. The Bankruptcy Court time study protocol is an example of a "diary" study, where judges recorded time and activity details for all of their official business over a 10 week period. The District Court time study protocol is an example of a "case-tracking" study, where a sample of cases were selected, and all judges who worked on a given sample case recorded the amount of time they spent on the case. Time studies, in general, have the substantial benefit of providing quantitative information that can be used to create objective and defensible measures of judicial workload, along with the capability to provide estimates of the uncertainty in the measures. At the conclusion of a case-tracking study, total time spent on each sample case closed during the study period is readily available by summing the recorded times spent on the case by each judge who worked on the case. For a given case type, the summed recorded times can be averaged to obtain an estimate of the average judicial time per case for that case type. For a diary study, however, it is necessary to make estimates of judicial workload for all cases that were not both opened and closed during the data collection period. This estimation step requires information from the caseload database, and thus the accuracy of estimates depends in part on the accuracy of the caseload data. Two kinds of information are required from the caseload database: case type and length of time the case has been open. With the diary approach, the total judicial time that is required for lengthy case types is estimated by combining "snap shots" of the time required by such cases of different ages. Thus, in theory, reducing accurate weights for lengthy case types is not problematic. In practice, however, difficulties may be encountered. For example, in the 1988-1989 bankruptcy time study, the asset and liability information for cases older than 22 months was inadequate and appropriate adjustments had to be made. In addition, difficulties may arise if only a small number of cases of the lengthy type are in the system. This is an issue FJC said it is considering as it finalizes how to assess the judicial work associated with mega cases in the upcoming bankruptcy case-weighting study. Each study type has advantages and disadvantages. The following outlines the similarities and differences in terms of burden, timeliness of data collection, post-data collection steps, accuracy, and comprehensiveness. Each study type places burden on judicial personnel during data collection. It is not clear that one study type is less burdensome than the other. The diary study procedure requires more concentrated effort, but data are collected for a shorter period of time. Data collection for a diary study can be completed more quickly than for a case-tracking study. Post Data Collection Steps More effort is needed to convert diary study data to judicial workload estimates than case tracking study data. Also, the accuracy of estimates from diary study data depends in part on the accuracy and objectivity of the information in the caseload database. It is not clear that one study type collects more accurate data than the other study type. Some of the Bankruptcy Court case-related time study data could not be linked to a specific case type due to misreporting errors and/or errors in the caseload database. Some error of this type likely is unavoidable because of the requirement to record all time rather than record time for specific cases only. However, it is plausible that a diary study collects higher quality data, on average, because all official time is to be recorded during the study period; judicial personnel become accustomed to recording their time. In contrast, the data quality for a case- tracking study could decline over the study's length; for example, after a substantial proportion of the sample cases are closed, judicial personnel could become less accustomed to recording time on the remaining open cases. In theory, a case-tracking study collects more comprehensive information about judicial effort on a given case than a diary study, because data for a sampled case almost always are collected over the duration of the case. (Data collection may be terminated for a few cases that remain open, or are reopened, many years after initial filing.) For case types that simultaneously stay open for a long period and require a substantial amount of judicial effort, it is possible that a diary study would not be able to produce suitable estimates of judicial workload due to a lack of data. 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 Judicial Conference of the United States, the federal judiciary's principal policymaking body, uses 1,500 annual weighted case filings per authorized judgeship (judgeship position) in a bankruptcy court as an indicator of the need for additional bankruptcy judgeships for that court. Total annual weighted case filings for any specific bankruptcy court is the sum of the weights associated with each of the cases filed in the court in a year. Total annual weighted case filings per judgeship represent the estimated average amount of judge time that would be required to complete the cases filed in a specific bankruptcy court in a year. In May 2003 GAO testified on whether weighted case filings were a reasonably accurate measure of the case-related workload of bankruptcy judges. The accuracy of weighted case filings rests in turn on the soundness of the methodology used to develop them. GAO's work focused on whether the methodologies used to develop the current case weights and to revise and update those weights were likely to result in reasonably accurate measures of bankruptcy judges' case-related workload. This statement is based on GAO's May 2003 testimony on weighted case filings as a measure of bankruptcy judges' case-related workload and documentation provided by the Federal Judicial Center (FJC) in June 2009 on subsequent efforts to update the current weighted filings measure. In May 2003 GAO reported that the methodology used to develop the case-related workload measure for federal bankruptcy judges--weighted case filings--were likely to result in reasonably accurate workload measures. The current study to revise those weights, begun in 2008, uses the same methodology as the study used to develop the current case weights and, as designed, is also likely to result in reasonably accurate workload measures. (1) The time demands on bankruptcy judges are largely a function of the number and complexity of the cases on their dockets, with some cases taking more time than others. To measure these differences, the Judicial Conference uses weighted case filings, which are a statistical measure of the average estimated judge time that specific types of bankruptcy cases are expected to take. Each case filed is assigned a weight, and the total weight of all cases filed in a bankruptcy court divided by the number of judgeships for that court provides a measure of the total average case-related workload per judgeship. (2) In assessing the need for new bankruptcy judgeships, the Judicial Conference relies on the weighted case filings to be a reasonably accurate measure of case-related bankruptcy judge workload. Whether the weighted filings are reasonably accurate depends in turn upon the soundness of the methodology used to develop the case weights. (3) On the basis of the documentation provided for our review and discussions with FJC and Administrative Office of the U.S. Courts officials, GAO concluded in 2003 that the case weights, as approved by the Judicial Conference in 1991 and 1996, were likely to be reasonably accurate. (4) The original case weights are now 18 years old. Changes in the intervening years in case characteristics, case management practices, and the implementation of new statutory or procedural requirements, such as the many changes in 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, may have affected the continued accuracy of the current case weights. (5) To the extent that the case weights now understate or overstate the total time demands on bankruptcy judges, use of the weights could potentially result in the Judicial Conference understating or overstating the need for additional bankruptcy judgeships. (6) In 2008, the Federal Judicial Center began a study to revise the current case weights that is designed to collect data on the time bankruptcy judges spend on cases filed during 5, 10-week data collection periods from May 2008 through May 2009. Each active and recalled bankruptcy judge is to participate during one of the five reporting periods. This study design permits the development of new case weights based on the same type of objective time data as the current weights, which we found to be reasonable.
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The American Diabetes Association's (ADA) clinical care recommendations, which reflect the published research evidence and expert opinion, are widely accepted as guidance on what constitutes quality diabetes care. We selected for review six of ADA's recommended monitoring services that can be measured using Medicare claims data (see table 1). The service frequencies recommended in table 1 generally apply to the average person with noninsulin-dependent diabetes, the type that accounts for more than 90 percent of diabetics in Medicare. Of course, some individuals may need more or fewer services depending on their age, medical condition, whether they use insulin, or how well their blood sugar is controlled. Eye exam (dilated) Flu shot (in season) As figure 1 shows, our cohort of about 168,000 Medicare beneficiaries with diabetes in fee-for-service delivery fell far short of the recommended frequencies of most monitoring services in 1994. Although 94 percent of the beneficiaries received at least two physician visits, less than half (42 percent) received an eye exam, only 21 percent received the recommended two glycohemoglobin tests, and 53 percent had a urinalysis. The fact that 70 percent received a serum cholesterol test may reflect both the successful public education campaign in the late 1980s and the frequent inclusion of cholesterol in automated blood tests. We believe the flu shot (44 percent) is underreported in Medicare claims data, because many people receive flu shots in nonmedical settings. Utilization rates are even lower when the monitoring services are considered as a unit. (See fig. 2.) About 12 percent of our diabetes cohort did not receive any of four key monitoring services: at least one each of the eye exam, glycohemoglobin test, urinalysis, and serum cholesterol test. About 11 percent showed Medicare claims for all four of these services. We analyzed utilization rates by patient characteristics and found that rates were generally similar for men and women and for all age groups over age 65. However, only 28 percent of beneficiaries under age 65 (who were eligible for Medicare because of disability) received an eye exam, compared with 43 percent of those aged 65 to 74 and 44 percent of those 75 and older. We also found that white beneficiaries with diabetes received the six monitoring services at consistently higher rates than beneficiaries who were black or of another racial group, but the differences were not great. We were unable to conduct a similar analysis of the six monitoring services' use rates among beneficiaries with diabetes who were enrolled in Medicare HMOs because HCFA does not require its HMO contractors to report patient-specific utilization data. According to the limited data we obtained from published research and other sources, however, it appears that use rates are also below recommended levels in Medicare HMOs. Although it is unclear what specifically accounts for the less-than-recommended use of monitoring services found in our study, a number of factors--including patient and physician attitudes and practices--may contribute to the situation. Some experts expressed concern that both patients and physicians need to take diabetes more seriously and make the effort to manage it more aggressively. Patients with a chronic condition such as diabetes bear much of the responsibility for successful disease management; but for many patients, self-management does not become a priority until serious complications develop. Then, difficult lifestyle changes may be required, such as weight loss, smoking cessation, and increased exercise. Patients may lack the knowledge, motivation, and adequate support systems to make these changes in addition to undertaking the active self-monitoring and preventive service regimens that are necessary to control diabetes. The substantial out-of-pocket costs of active self-management also may discourage Medicare beneficiaries with diabetes. Diabetes-related supplies that are used at home, such as insulin, syringes, and blood glucose-testing strips, are not fully covered by Medicare. For example, insulin costs about $40 to $70 for a 90-day supply, syringes cost $10 to $15 per 100, and glucose-testing strips cost 50 to 72 cents each (or about $1,000 a year for a diabetic who tests four times a day). Another factor in the underutilization of recommended preventive and monitoring services may be physicians and other health care providers who are not familiar with the latest diabetes guidelines and research supporting the efficacy of treatment. Moreover, many Medicare beneficiaries with diabetes have several serious medical conditions, and in the limited time of a patient visit, a physician is likely to focus on the patient's most urgent concerns, perhaps neglecting ongoing diabetes management and patient education. Finally, managed care plans and physician practices alike tend to lack service-tracking systems capable of reminding physicians and patients when routine preventive and monitoring services are needed. range of diabetes management efforts, and a few were developing comprehensive programs; but most plans' efforts were limited primarily to educational approaches. Most efforts were initiated recently, and little is known yet about their effectiveness. Every HMO in our survey reported using at least one approach to educate enrollees with diabetes about appropriate diabetes management. The most common approach--used by 82 of the 88 plans--was featuring articles about diabetes in publications for all enrollees. In addition, some plans provided comprehensive manuals to their diabetic enrollees. Sixty-eight HMOs reported having diabetes-related health professionals, such as nurses, certified diabetes educators, and nutritionists available to educate enrollees. A number of plans offered classes for several levels of diabetes education ranging from basic to advanced. Ten plans contracted with disease management companies to provide diabetes education services, and a few reported telephone advice services. Most of the HMOs reported they also had undertaken educational efforts directed to their physicians, stressing the importance of preventive care through such means as written materials and meetings. Nearly three-fourths of the HMOs reported using clinical practice guidelines for diabetes care. In one HMO, endocrinologists meet regularly with small groups of primary care physicians to provide training on important diabetes topics, such as diabetic eye disease and foot care. This plan also has developed a physician training video on diabetic foot care. Although information and education may produce short-term behavioral changes, they may not be enough to sustain the long-term behavioral and lifestyle changes necessary to achieve good diabetes control. Recognizing this, many of the HMOs in our survey reported using additional approaches to continuously encourage appropriate diabetes management. For example, about half of the HMOs reported one or more types of reminders for enrollees and physicians, such as wallet-sized scorecards for enrollees to chart receipt of recommended services and posters in examining rooms reminding patients to take off their shoes and socks to prompt physicians to check their feet. As another example, 52 of the 62 plans that used clinical practice guidelines for diabetes reported having a system to monitor physicians' compliance with the guidelines and, in some cases, to provide feedback to the physicians. In our follow-up interviews with 12 HMOs that reported using a variety of diabetes services, 5 told us they have committed substantial resources to develop systemwide, comprehensive diabetes management programs. For example, one HMO has based its approach to diabetes management around the long-term goals of improving patient health status and satisfaction as well as on plan performance on cost and utilization. Through a variety of interventions, such as diabetes care clinics, patient self-management notebooks, and diabetes education by telephone, this HMO tries to improve patient outcome measures ranging from improved blood glucose control and prevention of microvascular disease to the patient's assessment of improved quality of life and sense of well-being. Interventions designed to help physicians provide better diabetes care include an online diabetes registry updated monthly, use of evidence-based clinical practice guidelines, outcomes reports for physicians, and training by diabetes expert teams. Even the HMOs reporting the most comprehensive programs, however, generally had little information about the extent to which their diabetes management approaches had affected the use of recommended preventive and monitoring services. At best, they tended to collect utilization data on five or fewer services, and they began collecting these data only in 1993 or 1994. The service monitored most frequently, by 58 of the plans, was the diabetic eye exam. This was probably due to the eye exam's inclusion in HEDIS (the Health Plan Employer Data and Information Set), the performance-reporting system for commercial HMOs. Although little information exists on the relative effectiveness of specific diabetes management approaches, experts generally believe that intensive and sustained interventions, such as in-person counseling and education rather than telephone calls or mailings, are most likely to support long-term behavior change. Because intensive interventions probably are more expensive than other approaches, it is important to measure their effectiveness before committing resources to them. diabetes as well as patient and provider education about diabetes and practice guidelines. HCFA works with local peer review organizations (PRO), each of which currently is required to implement at least one diabetes-related quality improvement project involving the providers in its state or states. A total of 33 diabetes-related projects were under way in late 1996. Finally, HCFA is sponsoring a multistate evaluation of diabetes intervention strategies, the Ambulatory Care Diabetes Project, which involves fee-for-service and HMO providers and PROs in eight states. The project has completed its baseline data collection and intervention stages, and began remeasurement for outcomes analysis in January 1997. HCFA also wants to encourage development of better data collection systems for improved service utilization tracking. The agency anticipates requiring its Medicare HMO contractors to report the new HEDIS 3.0 performance measures, which include the diabetic eye exam and flu shot rates, and may add a measure of the glycohemoglobin test in the future. Moreover, HCFA is supporting research on other process- and outcomes-based performance measurement systems and is considering testing the feasibility of performance measurements in fee-for-service Medicare. Like the diabetes management approaches we learned about in our survey of Medicare HMOs, HCFA's initiatives either have been undertaken recently or are still in the planning stages, and it is too soon to tell which of these projects will prove most effective. At the same time, some diabetes specialists have suggested that HCFA should be doing more, such as studying the effects of easing current coverage limitations on diabetes self-management training and supplies like blood-testing strips. Diabetes care is a microcosm of the challenges facing the nation's health care system in managing chronic illnesses among the elderly. The prevalence and high cost of diabetes make it an opportune target for better management efforts. When beneficiaries receive less than the recommended levels of preventive and monitoring services, the result may be increased medical complications and Medicare costs. Conversely, following the recommendations may enhance beneficiaries' quality of life. physicians. Among HMOs, where coordinated care and prevention are expected to receive special emphasis, many plans are exploring ways to improve diabetes management; but providers may be reluctant to invest in expensive approaches until their cost-effectiveness is more evident. HCFA, also recognizing the importance of this issue, has initiated a promising strategy of testing a variety of approaches to learn what works best in Medicare--that is, what is effective and what can be implemented at reasonable cost. Mr. Chairman, this concludes my statement. I would be happy to answer any questions from you and other members of the Subcommittee. Thank you. This testimony was prepared under the direction of Bernice Steinhardt, Director, Health Services Quality and Public Health Issues, who may be reached at (202) 512-7119 if there are any questions. Other key contributors include Rosamond Katz, Assistant Director, and Ellen M. Smith, Jennifer Grover, Evan Stoll, and Stan Stenersen, Evaluators. 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GAO discussed its recent report on preventive and monitoring services provided to Medicare beneficiaries with diabetes, focusing on: (1) the extent to which Medicare beneficiaries with diabetes receive recommended levels of preventive and monitoring services; (2) what Medicare health maintenance organizations (HMO) are doing to improve delivery of recommended diabetes services; and (3) the activities that the Health Care Financing Administration (HCFA) supports to address these service needs for Medicare beneficiaries with diabetes. GAO noted that: (1) while experts agree that regular use of preventive and monitoring services can help minimize the complications of diabetes, most Medicare beneficiaries with diabetes do not receive these services at recommended intervals; (2) this is true both in traditional fee-for-service Medicare, which serves about 90 percent of all beneficiaries, and in managed care delivery; (3) the efforts of Medicare HMOs to improve diabetes care have been varied but generally limited, with most plans reporting that they have focused on educating their enrollees with diabetes about self-management and their physicians about the need for preventive and monitoring services; (4) very few plans have developed comprehensive diabetes management programs; and (5) at the federal level, HCFA has targeted diabetes for special emphasis and has begun to test preventive care initiatives, but like the HMOs, HCFA's efforts are quite recent and the agency does not yet have results that would allow it to evaluate effectiveness.
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All Medicare beneficiaries entitled to benefits under Medicare Part A or enrolled in Part B are eligible to enroll in Medicare Part D. Medicare beneficiaries who qualify for full coverage under their state's Medicaid program, as well as Medicare beneficiaries who qualify for more limited Medicaid coverage, Supplemental Security Income (SSI), or state Medicare Savings Programs are automatically enrolled in a prescription drug plan by CMS, automatically qualify for the full subsidy of their premium and deductible, and do not need to file an application. They are referred to as "deemed." Other Medicare beneficiaries who do not automatically qualify for the subsidy (i.e., who are not deemed) must apply and meet the income and resource requirements. These beneficiaries generally qualify if they have incomes below 150 percent of the federal poverty level and have limited resources. Generally, in 2007, individuals qualify if they have an income of less than $15,315 and have resources of less than $11,710; couples qualify if they have a combined income of $20,535 and resources of $23,410. The amount of the subsidy for premiums, deductibles, copayments, and catastrophic coverage varies, depending on income and resources. Subsidy benefits are provided to these individuals on a sliding scale, depending on their income and resources. Individuals generally apply for the benefit directly through SSA, although they may also apply through their state Medicaid office. The agency that receives an application, whether SSA or a state Medicaid agency, is responsible for making initial subsidy determinations and deciding appeals and redeterminations. Those who apply through SSA may submit their subsidy application using SSA's paper application or an Internet application form. Applicants may also have their information entered electronically by visiting an SSA field office or by calling SSA's toll-free phone line. Under the MMA, beneficiaries may also apply for the subsidy through their state Medicaid office. However, according to state Medicaid officials we spoke with, they encouraged beneficiaries to apply for the subsidy through SSA whenever possible. As of March 2007, only the Colorado and Kansas state Medicaid agencies had made Part D subsidy determinations. Under the MMA, the Congress provided SSA with a $500 million appropriation from the Federal Hospital Insurance Trust Fund and the Federal Supplementary Medical Insurance Trust Fund to pay for the initiation of SSA's Part D responsibilities, and the activities for other MMA responsibilities for fiscal years 2004 and 2005, but later extended the appropriation to fiscal year 2006. Since January 2006, SSA officials told us that the agency has had to draw on its overall administrative appropriation to support its Part D activities. SSA has approved 2.2 million applicants for the subsidy as of March 2007, despite some barriers, but measuring their success is difficult because no reliable data are available to identify the eligible population. SSA officials told us that their outreach goal was to inform all individuals potentially eligible for the subsidy and provide them an opportunity to apply for the benefit. Because the agency lacked access to reliable data that might help target their outreach efforts more narrowly, SSA used income records and other government data to identify a broad group of potentially eligible individuals. Outreach efforts were further limited by several barriers to soliciting applications. Since its initial outreach campaign, SSA has not developed a comprehensive plan to identify its continued outreach efforts apart from other activities. SSA conducted its initial outreach campaign from May 2005 to August 2006, but has decreased its efforts since then. SSA sent targeted mailings, which included an application for the subsidy and instructions on how to apply, to the 18.6 million individuals it had identified as potentially eligible. After the subsidy applications were mailed, a contractor then made phone calls to 9.1 million beneficiaries who had not responded to the initial mailing. SSA also conducted other follow up efforts, including sending notices to individuals whom the contractor was unable to contact and to specific subgroups that it identified as having a high likelihood of qualifying for the subsidy, such as the disabled; individuals 79 years of age and older living in high-poverty areas; and individuals in Spanish-speaking, Asian-American, and African-American households. The outreach efforts also included over 76,000 events conducted in collaboration with federal, state, and local partners, such as CMS, state Medicaid agencies, state health insurance programs, and advocacy groups for Medicare beneficiaries. Events were held at senior citizen centers, public housing authorities, churches, and other venues. As figure 1 shows, the number of outreach events has declined significantly, from a high of 12,150 in July 2005 to 230 at the completion of the campaign in August 2006. Although the initial campaign has ended, SSA is continuing to solicit applications. For example, SSA has conducted various activities to inform individuals in rural and homeless communities about the subsidy, and is planning to launch a new strategy this week for Mother's Day to inform relatives and caregivers--the sons, daughters, grandchildren and family friends---about the subsidy. SSA has incorporated its strategy for continuing outreach efforts for the subsidy into its National Communications Plan. However, it has not developed a comprehensive plan that specifically identifies those efforts separate from other agency activities. As a result, SSA has a limited basis for assessing its progress and identifying areas that require improvement. SSA did not have access to data that might have helped to narrowly target the eligible population. Because of the lack of reliable data for identifying the entire population, SSA broadly targeted 18.6 million individuals who might be eligible for the subsidy. SSA identified the target population by using income data from various government sources to screen out Medicare beneficiaries whose income made them ineligible for the Part D subsidy. SSA realized that using these data sources would result in an overestimate of the number of individuals who might qualify for the subsidy, because the data provided limited information on individuals' resources or nonwage income. SSA officials said they took this approach to ensure that all Medicare beneficiaries who were identified as potentially eligible for the subsidy were made aware of the benefit and had an opportunity to apply for it. SSA officials said that they would have preferred to specifically target Medicare beneficiaries who were likely to be eligible for the subsidy by using tax data from IRS on individuals' wage, interest, and pension income. Current law permits SSA to obtain income and resource data from IRS to assist in verifying income and resource data provided on subsidy applications. The law, however, prohibits IRS from sharing such data with SSA to assist with outreach efforts. According to SSA officials, such data would allow SSA to identify individuals to target for more direct outreach and to estimate how many individuals qualify for the subsidy. In November 2006, the HHS Office of Inspector General reported that legislation is needed to provide SSA and CMS access to income tax data to help the agencies more effectively identify beneficiaries potentially eligible for the subsidy. SSA officials believe IRS income tax data could provide access to information on individuals' income and resources. However, IRS officials told us that its data have many limitations. For example, IRS officials said that they have limited data on resources for individuals whose income is less than $20,000, because these individuals do not typically have interest income, private pensions, or dividend income from stocks that could assist SSA in estimating an individual's potential resource level. Also, the officials said that many people with low incomes do not have incomes high enough to require them to file taxes, and therefore, IRS might not have information on them. IRS also explained that its tax data would most likely identify individuals that would not qualify for the subsidy, rather than individuals that would qualify. Moreover, the IRS officials said that the data it would provide to SSA to determine eligibility could be almost 2 years old. For example, for subsidy applications filed in early 2007, the last full year of tax data the IRS could provide would be for 2005. Given these factors, IRS officials stated that summarily sharing private taxpayer data to identify individuals who could qualify for the subsidy, and the potential cost of systems changes, would have to be weighed against the added value of the data. No effort has been undertaken to determine the extent to which IRS data could help SSA or improve estimates of the eligible population. Legislation is currently pending before the Congress to permit IRS to share taxpayer data with SSA to assist the agency in better identifying individuals who might be eligible for the subsidy. SSA's efforts to solicit applications were hindered by beneficiaries' confusion about applying for subsidy and the drug benefit. According to SSA field office staff and state Medicaid and advocacy group officials, many individuals were confused about the difference between the prescription drug benefit and the subsidy, and did not understand that they involved separate application processes. Consequently, some individuals thought that once they were approved for the subsidy, they were also automatically enrolled in a prescription drug plan. Additionally, some individuals were reluctant to apply because they did not want to share their personal financial information for fear that an inadvertent error on the application could subject them to prosecution under the application's perjury clause. Though individuals have become more educated about the subsidy, concerns remain about eligibility requirements and the overall complexity of the application. SSA field office staff and advocacy group officials have concerns that the eligibility requirements set by the MMA may be a barrier. For example, they said that the subsidy's resource test may render some low-income individuals ineligible because of retirement savings or the value of other resources. Legislation has been proposed to increase the resource limit. Advocacy group officials have also said that the application may be too complex for many elderly and disabled beneficiaries to understand and complete without the assistance of a third party. SSA headquarters officials told us they worked with various focus groups to develop the subsidy application and that they have revised the application several times to address such concerns, but that much of the information that applicants may view as complex is required by the MMA. The success of SSA's efforts is uncertain because no reliable data exist on the total number of individuals potentially eligible for the subsidy. Using available estimates of the potentially eligible population, SSA approved 32 to 39 percent of the eligible population who were not automatically deemed by CMS for the subsidy. According to these estimates by CMS, the Congressional Budget Office, and other entities, about 3.4 million to 4.7 million individuals are eligible for the subsidy, but have not yet enrolled (See table 1.) In developing these estimates, however, these entities faced the same data limitations as SSA in identifying potentially eligible individuals. SSA officials said that it is unfair to judge the success of its outreach efforts for the subsidy in relation to the estimates of the total eligible population, given the limitations in identifying it. SSA officials stated that their efforts have been successful in meeting their outreach goals. In fact, after almost 2 years of implementation efforts, SSA's participation rate compares favorably to that of the Food Stamp Program, which had a participation rate of 31 percent after its second year of implementation. The low-income subsidy participation rate compares less favorably, however, to that of the Supplemental Security Income program, which had a participation rate of approximately 50 percent among the aged a year after the program began. SSA officials noted that the SSI participation rate included individuals who were automatically transferred from state government programs to SSI, which is somewhat similar to the "deemed" population that was automatically transferred to the low-income subsidy. SSA has collected data and established some goals to monitor its progress in implementing and administering the subsidy benefit, but still lacks data and measurable goals in some key areas. To enable agencies to identify areas in need of improvement, GAO internal control standards state that agencies should establish and monitor performance measures and indicators. Accordingly, agencies should compare actual performance data against expected goals and analyze the differences. SSA monitors various aspects of its determination process, such as the number of applications received and their outcomes and length of processing, but did not establish a performance goal for processing times until March 2007. SSA largely relies on an automated process to determine individuals' eligibility for the subsidy. Income and resource data provided by the applicant are electronically compared to income data provided by IRS and other agencies to determine if the individual meets income and resource requirements. SSA field office staff follow up with individuals in cases where there are conflicting data or questions. SSA tracks the number of eligibility determinations, the outcome of those determinations, and the length of time for completing the determinations. SSA also tracks denials and periodically samples denied claims to examine the reasons for such actions. As of March 2007, approximately 6.2 million individuals had applied for the subsidy. SSA received the heaviest volume of applications when the public outreach campaign was the most active. Figure 2 provides data on the cumulative number of subsidy applicants and approvals from November 2005, when SSA began tracking the data, to December 2006. While SSA has captured data on the length of time it takes to make eligibility determinations, it did not develop the capability to report the data, and did not establish a performance goal for processing times until March 2007. SSA has now established a goal of processing 75 percent of subsidy applications in 60 days. Of the approximately 6.2 million individuals who had applied for the subsidy as of March 2007, SSA approved 2.2 million, denied 2.6 million, and had decisions pending for 80,000 applicants. SSA officials determined that no decision was required for 1.4 million because they were duplicate applications, applications from individuals automatically qualified for the subsidy, or canceled applications. To identify reasons for subsidy denials, SSA conducted three separate studies that sampled a total of 1,326 denied claims. These studies showed that 47 percent of applicants were denied due to resources and 44 percent because of income that exceeded allowable limits set by the MMA. SSA officials stated that they plan to conduct a longitudinal study to examine the reasons for all denied claims. SSA tracks data on the total number of appeals, the reason for appeals, the time it takes to process them, the method used to resolve them, and their final disposition. Individuals may appeal denied claims, as well as the level of the subsidy, by calling SSA's national toll-free number, submitting the request in writing, or visiting any Social Security field office. Individuals may also complete an appeals form available on SSA's Web site and mail it to SSA. Individuals have the choice of having their appeal conducted through a telephone hearing or a case file review. According to SSA, about 79,000, or 3 percent of denied subsidy applications were appealed from August 2005 to February 2007. SSA completed about 76,000 appeals in that time frame. On the basis of an SSA sample of 781 appeals, SSA reversed its decision for 57 percent of the cases and upheld its decision for the remaining 43 percent. SSA data show that the overall volume of appeals received was the highest between November 2005 and July 2006, declined between August and November 2006, and rose again between December 2006 and February 2007. During the decline, SSA closed all but one of its six Special Appeals Units by October 2006. Further, the time it took SSA to process appeals varied widely, and did not necessarily decrease when the caseloads grew smaller. SSA tracks various results from the redeterminations process, such as the number of decisions made, and number and level of continued subsidies. However, SSA does not track processing time for redetermination decisions and has not established a performance time target for processing such actions. According to the MMA and SSA regulations, all recipients of the subsidy are required to have their eligibility redetermined within 1 year after SSA first determines their eligibility. Future redeterminations are required to be conducted at intervals determined by the Commissioner. SSA's regulations provide that these periodic redeterminations be based on the likelihood that an individual's situation may change in a way that affects subsidy eligibility. Additionally, SSA's regulations provide that unscheduled redeterminations may take place at any time for individuals who report a change in their circumstances, such as marriage or divorce. SSA officials stated that since the redeterminations process is conducted within a certain period of time, it is unnecessary to track the processing time for individual redetermination decisions. SSA initiated its first cycle of redeterminations in August 2006, which including all of the approximately 1.7 million individuals who were determined to be eligible for the subsidy prior to April 30, 2006. SSA excluded from the redeterminations process about 562,000 individuals who were either deceased, automatically deemed eligible for the benefit by CMS, or whose subsidy benefit had been terminated. SSA data show that as of February 2007, SSA had completed approximately 237,000 redeterminations. About 69,000 individuals remained at the same subsidy level, another 69,000 had a change in their subsidy level, and 98,000 individuals had their subsidies terminated, based on a change in their circumstances. SSA has monitored some aspects of the increased workload and found that implementing the low-income subsidy was manageable overall, due to increased funding for its MMA startup costs. Although the subsidy program affected SSA's workload and operations, SSA officials told us that implementing the subsidy did not significantly affect the agency's workload and operations. SSA hired a total of 2,200 field office staff to assist with subsidy applications, as well as an additional 500 headquarters staff to support its MMA activities. SSA officials attribute the light impact of the subsidy program to various factors, including the automation of the subsidy application process and the $500 million appropriation it received for administrative startup costs to implement its MMA responsibilities. SSA officials pointed out that as they implemented the subsidy, the processing times for other workloads improved. Officials explained that they were able to manage the other workloads because the peak increases in subsidy applications and inquiries were short-lived, allowing SSA's operations to return to a more normal operating level after handling these peak work volumes. SSA officials stated that they expect small increases in its low-income subsidy workload during future prescription drug plan open seasons, which are typically held from November to December. Although SSA can track expenditures for implementing its various MMA responsibilities overall, it cannot track expenditures related specifically to low-income subsidy activities. For example, SSA cannot calculate how much of the $500 million appropriation it received for MMA startup costs was spent on the subsidy program versus its other MMA responsibilities. Although SSA could not provide documentation of the total amount of its subsidy-related expenditures, it estimates that its costs related to administering the subsidy are about $175 million annually, based on workload samples. However, SSA is planning to develop a tracking mechanism to more accurately capture the data. Recent increases in SSA's administrative resources may have also been a factor in limiting the impact of the subsidy program workload. The amount of SSA's administrative costs covered by the Medicare Trust Funds is projected to increase by about 37 percent between fiscal year 2003 and fiscal year 2008. This increase occurred despite the transfer of the Medicare appeals processing function from SSA to CMS in 2005. While this increase has helped SSA to carry out its various Medicare responsibilities (such as taking applications for Medicare benefits and withholding Medicare premiums, among others), it may have also helped to cushion the impact of the subsidy program. Reaching the millions of people who are forgoing the government's help in paying for their prescription drug benefit remains a significant challenge. Using the $500 million appropriation for its MMA start up costs, SSA was able to initiate the Part D subsidy and sign up 2 million people for the subsidy without adversely affecting SSA's overall operations. However, while it is not clear how to reach the remaining eligible people, the momentum of the initial outreach campaign should not be lost. The barriers to identifying eligible people and convincing them to sign up remain. For some, the subsidy application is complicated, which is due in part to the low-income subsidy eligibility requirements. Further, no one has yet studied whether or not IRS data can help identification efforts. While advocacy groups have called for a more personalized outreach approach to encourage additional enrollments, it may be unrealistic to expect SSA to conduct such efforts, given its resource limitations. Both a better understanding of who is eligible and a plan for continued outreach could help SSA make efficient use of limited staff resources by targeting outreach more narrowly to the eligible population. Further, a timely and reliable process for deciding initial determinations, hearing appeals, and making redeterminations is essential to effective management of the subsidy. SSA has focused on developing and improving the processes for serving its customers in a timely manner. As SSA moves forward, it may need better information to ensure that the subsidy program serves its target population as efficiently and effectively as possible. We are considering recommendations for SSA to work with IRS to assess the extent to which taxpayer data could help identify individuals who might qualify for the subsidy, and help improve estimates of the eligible population; and for SSA to develop a plan to guide its continuing outreach efforts and develop key management tools to measure the results of its subsidy application processes. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other members of the committee may have at this time. For further information regarding this testimony, please contact Barbara D. Bovbjerg, Director, Education, Workforce, and Income Security Issues, on (202) 512-7215. Blake Ainsworth, Jeff Bernstein, Mary Crenshaw, Lara L. Laufer, Sheila McCoy, Kate France Smiles, Charles Willson, and Paul Wright, also contributed to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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To help the elderly and disabled with prescription drug costs, the Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003, which created a voluntary outpatient prescription drug benefit (Medicare Part D). A key element of the prescription drug benefit is the low-income subsidy, or "extra help," available to Medicare beneficiaries with limited income and resources to assist them in paying their premiums and other out-of-pocket costs. To assess Social Security Administration's (SSA) implementation of the Medicare Part D low-income subsidy, GAO was asked to review (1) the progress that SSA has made in identifying and soliciting applications from individuals potentially eligible for the low-income subsidy, and (2) the processes that SSA uses to track its progress in administering the subsidy. This statement is drawn from GAO's ongoing study for the committee on the Medicare Part D low-income subsidy, which is expected to be published at the end of May. To conduct this work, GAO reviewed the law, assessed subsidy data, and interviewed officials from SSA, the Centers for Medicare and Medicaid Services, the Internal Revenue Service, state Medicaid agencies, and advocacy groups. SSA approved approximately 2.2 million Medicare beneficiaries for the low-income subsidy as of March 2007, despite barriers that limited its ability to identify individuals who were eligible for the subsidy and solicit applications from them. However, the success of SSA's outreach efforts is uncertain because there are no reliable data to identify the eligible population. SSA officials had hoped to use Internal Revenue Service (IRS) tax data to identify the eligible population, but the law prohibits the use of such data unless an individual has already applied for the subsidy. Even if SSA could use the data, IRS officials question its usefulness. Instead, SSA used income records and other government data to identify 18.6 million Medicare beneficiaries who might qualify for the subsidy, which was considered an overestimate of the eligible population. SSA mailed low-income subsidy information and applications to these Medicare beneficiaries and conducted an outreach campaign of 76,000 events nationwide. However, since the initial campaign ended, SSA has not developed a comprehensive plan to distinctly identify its continuing outreach efforts apart from other agency activities. SSA's efforts were hindered by beneficiaries' confusion about the distinction between applying for the subsidy and signing up for the prescription drug benefit, and the reluctance of some potential applicants to share personal financial information, among other factors. SSA has collected data and established some goals to monitor its progress in administering the subsidy, but still lacks data and measurable goals in some key areas. While SSA tracks various subsidy application processes through its Medicare database, it has not established goals to monitor its performance for all application processes. For example, SSA tracks the time for resolving appeals and the outcomes of its initial redeterminations of subsidy eligibility, but does not measure the amount of time it takes to process individual redetermination decisions. According to SSA officials, implementing the low-income subsidy was manageable overall due to increased funding for the outreach and application processes and did not significantly affect the agency's workload and operations. GAO is considering recommendations for SSA to work with IRS to assess the extent to which taxpayer data could help identify individuals who might qualify for the subsidy, and help improve estimates of the eligible population; and for SSA to develop a plan to guide its continuing outreach efforts and develop key management tools to measure the results of its subsidy application processes.
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The SRB program is authorized by 37 U.S.C. 308 to help maintain an adequate level of experienced and qualified enlisted personnel. The program authorizes bonuses of up to $45,000 to personnel in critical skills who have between 21 months and 14 years of active-duty service and who reenlist or extend their reenlistments for at least 3 years. The intent of the program, according to DOD, is to focus reenlistment incentives on critical skills that are in short supply and have high training costs. The current SRB program can be traced to 1965, when the services began to experience increasing problems in first-term retention and career manning in a number of technical, high training cost skills. In addressing the problem, DOD recommended the creation of a flexible reenlistment bonus program that could be tailored to fit particular skill-retention requirements and that could be changed as those requirements changed. As a result, Congress established the Variable Reenlistment Bonus program in 1965. In the ensuing years, this became the SRB program and was modified and extended to address concerns about retention and manning problems. The Secretary of Defense has established three eligibility zones for the payment of SRBs. Zones are defined in terms of years of active-duty service. Zone A includes reenlistments falling between 21 months and 6 years of active duty; zone B, between 6 and 10 years; and zone C, between 10 and 14 years. The service secretaries designate which skills and which zones within those skills are eligible to receive SRBs. Servicemembers may receive only one SRB within any one zone. The total cost of new SRB contracts awarded has declined over the past 5 years (see fig. 1). According to service officials and budget justification documents submitted to Congress, the main reason for the declines was the force downsizing occurring during this period, which reduced the need for military personnel. According to DOD, SRB contracts declined by nearly 60 percent during the last 5 years while the force declined about 30 percent. In fiscal years 1993 and 1994, personnel in approximately 20 percent of DOD's enlisted skills were awarded SRBs. More than 30 percent of the enlisted personnel were in those skills. However, not all of these servicemembers would be eligible for SRBs in a given year because they would not be up for reenlistment in that year or would not be in a zone that was eligible for SRBs. According to DOD, 1.1 percent of all active-duty personnel received a new SRB contract in 1994, down from 2.4 percent in 1990. The cost of the SRB program varies considerably by service. Table 1 shows the number of people who received new SRB payments in fiscal year 1994, the total cost, and the average cost per recipient of those new SRB contracts. Nearly 60 percent of the total cost for new SRB contracts was incurred by the Navy. Also, the average new SRB contract cost per recipient was higher in the Marine Corps and the Navy than in the other two services. Many SRBs have gone to personnel who are not in skill categories where extensive shortages exist. To determine whether SRBs are awarded only where needed to overcome shortages, we applied two measures to each skill category that received SRBs in either fiscal year 1994 or 1993: (1) overall fill rate at the beginning of the fiscal year (defined as the percent of required positions that were filled) and (2) whether individuals in that same skill category had been given financial incentives to leave the service. We used the proportion of required positions filled as an indicator of whether a skill was experiencing a significant personnel shortage. The Status of Resources and Training System (SORTS), which is the system used by the services for reporting unit readiness, has established criteria that units with 90 percent of their assigned personnel on hand are considered prepared to conduct all required wartime missions. Therefore, we used the 90-percent fill rate as an indicator of high fill. Also, according to representatives of the Air Force and the Marine Corps, a fill rate of 90 percent or less in a skill category flags that category for consideration for an SRB. Neither the Army nor the Navy had a specific fill rate threshold for SRB consideration. Using service-provided fill rates and SRB information, we found that 81 percent of people awarded SRBs across DOD in fiscal year 1994 and 78 percent in fiscal year 1993 were in skill categories that were filled at least at the 90-percent level. The cost of these contracts was about $155 million in fiscal year 1994 and about $165 million in fiscal year 1993. Figures 2 and 3 show the percentage of new SRB contracts given to personnel in high-fill skill categories in fiscal years 1994 and 1993. The figures show the results of analyses at three levels of fill (90, 95, and 100 percent) by service. As these figures show, a substantial proportion of the SRB payments went to personnel in skill categories that were not experiencing large shortfalls. While the percentages drop as the fill rate increases, each service paid a substantial proportion of its new SRBs to personnel in skill categories that were already filled 100 percent or higher. Across DOD, 25 percent of fiscal year 1994 and 30 percent of fiscal year 1993 SRB recipients were in skill categories with fill rates of 100 percent or higher. The cost of these contracts was about $58 million in fiscal year 1994 and about $71 million in fiscal year 1993. In recent years, retention needs have declined with reduced force levels. To facilitate military downsizing, Congress authorized two types of special separation pay to personnel who voluntarily leave the military by September 30, 1999, but are not eligible to retire: (1) the Voluntary Separation Incentive (VSI), which is a variable annuity payment, and (2) the Special Separation Benefit (SSB), which is a one-time, lump-sum payment.We were initially told by OSD and service representatives that retention and exit bonuses should not be going to personnel in the same skill categories. However, in fiscal years 1994 and 1993, 48 percent of the personnel awarded new SRB contracts were in skill categories in which other personnel in the same skill categories received financial separation incentives. In fiscal year 1994, nearly 8,800 military personnel who received new SRB contracts (at a cost of about $73 million) were in the same skill categories as about 2,100 of the separation-incentive recipients (who received about $82 million to leave the military). In fiscal year 1993, nearly 10,300 military personnel who received new SRB contracts (at a cost of about $75 million) were in the same skill categories as about 2,100 of the separation incentive recipients (who received about $82 million to leave). Thus, either the services are paying SRBs to people with skills that are not in short supply or they are paying exit incentives to people with skills that are in short supply. Table 2 shows the number of new fiscal year 1994 SRB recipients in each service who were in skill categories where separation incentives were paid, the percentage of total SRB recipients that this group comprised, and the cost of those new SRB contracts. Eighty-four percent of the Army's new SRB recipients were in skill categories in which separation incentives were also paid. A more stringent test of whether SRBs were going to personnel who were not in shortage categories involves the determination of how many SRB recipients were in skill categories that had high fill rates and where other personnel in the same skill categories received incentive payments to leave the military. In fiscal years 1994 and 1993, 43 percent of the new SRB contracts awarded (at a cost of about $64 million in fiscal year 1994 and $65 million in fiscal year 1993) were in skill categories that met both of the measures we applied--fill rates of 90 percent or higher and payment of separation incentives. Furthermore, 9 percent of new SRB contracts awarded in fiscal year 1994 and 17 percent in fiscal year 1993 were in skill categories with fill rates of 100 percent or higher and to which exit incentives were paid. The cost of these contracts was about $14 million for fiscal year 1994 and about $29 million for fiscal year 1993. Figures 4 and 5 show the percentage of new SRB contracts by service that went to personnel in skill categories having high fill rates and where other personnel in the same skill categories received separation incentives in fiscal years 1994 and 1993. The number of separation incentives given by the Air Force in fiscal year 1993 includes those given in fiscal year 1992. Air Force officials told us that they ran fiscal years 1992 and 1993 exit incentive programs as one program and were unable to provide information on fiscal year 1993 by itself. The reduction of the percentages from fiscal years 1993 to 1994 in the Air Force and the Marine Corps results primarily from reductions in the number of separation incentives given. Service officials told us that although they had paid some people to stay and other people to leave in the same military skills, the retention and separation incentive programs were directed at different grade and year groups. We agree. However, we believe that if a skill is critically short and warrants retention bonuses, separation incentives should not be given to personnel in those skills. Air Force officials told us that they changed their policy in fiscal year 1994 to not allow members in SRB skills to separate using VSI/SSB except in cases of documented extreme hardships because they did not think it was appropriate to pay some people to stay and others to leave in the same skill. Service officials also said that their payment of VSI/SSB incentives to personnel in an SRB skill did not mean that they were satisfied with the fill rate in that skill. Rather, they said the separation incentives were given in an effort to comply with congressional direction to use voluntary means to achieve force reductions. While Congress encouraged the services to use voluntary means wherever possible to achieve needed reductions, we found no indication in the legislative history that Congress intended that the services offer voluntary separation incentives to personnel in critically short skills to avoid involuntarily separating personnel in skills with excesses. Service officials also took issue with our use of the 90-percent fill level as an indication that a skill was not critically short. We agree that some skills might be considered critically short at anything less than 100-percent fill. That is why we also provided data on the 95-percent and 100-percent fill levels. However, the services have not defined which skills require higher fill rates than the 90-percent criterion used for readiness reporting. OSD is not providing adequate direction and oversight of the SRB program. OSD guidance to the services for determining which skills should receive SRBs is general and oversight review of the services' programs is lacking. OSD guidance for determining those skills to receive SRBs instructs the services to use a "balanced evaluation" that "should include, but not be limited to, a full assessment of the following factors." Serious undermanning in three or more adjacent year-groups in the bonus zones. Chronic and persistent shortages in total career manning. High replacement cost. Skills that are relatively arduous or otherwise unattractive compared to other military skills or civilian alternatives. Skills that are essential to the accomplishment of defense missions. OSD has not defined many of the terms in its guidance, such as "serious undermanning" and "chronic and persistent shortages," nor has it established how much weight should be given to each of the selection factors. As a result, each service uses a different procedure to identify and prioritize which skills will receive SRBs. Service officials said that, in deciding who will receive SRBs, they consider factors similar to the OSD guidance, such as whether the skill is currently receiving an SRB, reenlistment trends, fill rates, the skill's criticality to accomplishing the defense mission, and the cost, length, and availability of training. They too have not established criteria for determining how much weight to give these various factors. OSD has proposed new guidelines for the SRB program, but these guidelines do not clarify the selection criteria. They state that the purpose of the SRB program is "to encourage the reenlistment of sufficient numbers of qualified enlisted uniformed services personnel in critical military specialties with high training costs or demonstrated retention shortfalls." The use of the connector "or" appears to broaden the purpose of the program, which is stated in the current guidelines as "intended to attract more reenlistments in critical military specialties characterized by retention levels insufficient to sustain the career force at an adequate level." While we agree that training costs should be a consideration in deciding whether to give retention bonuses, we do not believe that high training cost alone justifies payment of retention incentives if the personnel are not in specialties experiencing demonstrated retention shortfalls. Although OSD guidance specifies that OSD conduct a detailed annual review of the SRB program, examining each skill category programmed for an SRB, such annual reviews have not been conducted. A one-time study conducted by OSD in 1991 of the skill categories that the services were including in their programs, identified several areas of concern and questioned the need to provide SRBs to 34 percent of the proposed skill categories. OSD did not require the services to respond to the report's findings, took no action on the findings, and has conducted no further reviews of the SRB program. We recommend that the Secretary of Defense establish guidance and controls to ensure that the SRB program provides bonuses only for reenlistments in skill categories that are in short supply. Specifically, we recommend that the Secretary (1) provide more explicit guidance regarding the determination of shortage categories and eligibility for SRBs and require the services to establish and document more specific criteria for determining which skills will receive SRBs and (2) monitor the services' adherence to this guidance. Because of the extent to which exit incentives have been provided to personnel in skills which also received SRBs, we recommend that the Secretary ensure that payment of exit and retention incentives is coordinated so that they are not both provided to personnel in the same skill categories. DOD did not agree with our findings or recommendations, stating that our methodology and analysis were flawed. DOD's comments are included in their entirety in appendix I. DOD stated that our analysis was flawed by an assumption that 90 percent manning is a satisfactory level of fill in all skill categories. DOD stated that certain skill categories are imminently critical to the mission of each service and that, in many cases, 100 percent of authorized manning is not enough to do the job. Consequently, using 90 percent as the delineation of high fill for critical skills is unacceptable to DOD. We did not assume that 90-percent fill is necessarily sufficient. Although 90 percent of authorized positions is the fill level used in the official DOD unit readiness reporting system to indicate a capability to perform all assigned missions, we agree with DOD that what is considered to be an adequate fill level can vary by skill. For this reason, we provided data on the 90-percent, 95-percent, and 100-percent fill levels. Our point, therefore, was not that 90 percent represents high fill, but that DOD has failed to adequately define which skills require higher fill rates. That is, when DOD states that "certain skill categories are imminently critical to the mission of each service," we expected to find some definition or criteria that would identify which skills those were or how they could be determined. Furthermore, if it is true as DOD asserts that "in many cases . . . 100 percent of authorized manning is not enough to do the job," then manpower requirements need to be reexamined. In addition, if DOD believes that the 90-percent manning figure used in readiness reporting does not represent a level that enables a unit to perform all required missions, it needs to revise its criteria so that an accurate picture of readiness can be conveyed to military decisionmakers. DOD stated that our methodology was also flawed because we looked at manning levels across entire skills rather than looking at manning within SRB years of experience zones. DOD stated that it is essential to continue to administer the SRB program by zones "since the services have requirements for minimum levels of manning within each of these zones." However, enlisted force managers in each of the services told us that they do not manage their enlisted force by SRB zones nor do they routinely express their requirements by zone. Rather, they manage by grade level or years of service groups that overlap the SRB zones. We originally attempted to analyze fill rates by SRB zone, but, except for the Navy, the services could not readily provide us with fill rates by zone. In analyzing the Navy's data by zone, we found that about 50 percent of the skill zones given SRBs in fiscal year 1994 were filled at rates of 90 percent or higher. In fact, 35 percent were filled at rates of 100 percent or higher. Consequently, looking at fill rates by zone where the services were able to provide the data did not change our conclusion that some SRBs were being paid to people in skills that did not appear to have critical shortages. We found similar results when we looked at the Air Force. Air Force officials told us that they do not consider fill rates by zone when making SRB decisions. They stated that in most cases they provide SRBs to personnel in zones A and B to ensure sufficient personnel at the noncommissioned officer (NCO) level. In examining this, however, we found that most of the skills that were filled at or above the 90-percent level overall, also had NCO fill rates of at least 90 percent. In fiscal year 1994, 64 percent of SRB skills with fill rates of 90 percent or higher also had NCO fill rates of 90 percent or higher and 21 percent had fill rates of 100 percent or higher. In fiscal year 1993, 78 percent of SRB skills with fill rates of 90 percent or higher also had NCO fill rates of 90 percent or higher and 44 percent had fill rates of 100 percent or higher. Thus, looking at Air Force NCO fill rates rather than overall fill rates does not change the conclusion that some SRBs were being paid to people in skills that did not appear to have critical shortages. DOD noted that a person with 2 years' experience cannot be substituted for a person with 10 to 14 years of experience. We agree. Therefore, when we found the services paying separation bonuses to personnel with 10 to 14 years of experience in a skill area, we viewed it as an indication that the service personnel managers did not consider that skill area to be experiencing a critical shortfall. If service personnel managers believed that a skill area was critically undermanned, it would make no sense to provide incentives to the higher experienced personnel in that skill to leave the service and thus exacerbate the undermanning. DOD also noted that it is not cost-efficient for a senior person to perform a function for which he is overqualified. Again, we agree. However, if there is really a critical shortage of lower skilled personnel and an excess of higher skilled personnel in that same occupation, we would expect the service to backfill with the higher skilled personnel rather than paying them bonuses to leave. DOD also took issue with our finding that additional OSD oversight is required. DOD stated that the services and the Department spend a great deal of time and effort on the SRB program and it already goes through several lengthy review processes, including an annual budget justification. DOD also argues that the 1991 study declared the SRB program to be well-run and, therefore, no additional OSD oversight is required. The 1991 study, however, does not really support that conclusion. While making the general comment that the services' SRB programs were in compliance with DOD policy and were well-managed, the study identified 84 skills out of 250 (about 34 percent) that should be considered for further review. We could find no indication that those 84 skills were reexamined. Also, the study noted that the OSD policy guidance is very general and that there are numerous ways it can be interpreted, each interpretation leading to a very different analytic criteria. The study proposed an automated approach that would apply a set of objective criteria to each skill, resulting in two groups of skills--those that were acceptable and those that needed further consideration. The services would then be asked to comment on any skills that were identified by the criteria as needing further review. OSD also stated that it does not want to add more complications to an already cumbersome system by layering additional restrictions on the services. DOD also noted that the services need flexibility to be able to respond to rapidly changing requirements for readiness. We do not see the exercise of adequate oversight as necessarily decreasing flexibility. The 1991 study stated that the approach it proposed would allow each of the services to develop, execute, and justify its SRB plans based on its unique requirements and objectives as long as they fit within the overall policy guidance. Rather than use the approach suggested by the 1991 study or develop a similarly streamlined method of maintaining adequate oversight, OSD has opted for reducing its oversight of the SRB program. DOD Instruction 1304.22 stated that OSD "shall conduct a detailed annual review of the enlistment bonus, selective reenlistment bonus, and special duty assignment pay programs" in conjunction with Program Objectives Memorandum cycle. It further stated that each military specialty programmed for a bonus in the next 2 fiscal years shall be examined. However, OSD has not performed such a review since the 1991 study and it has drafted new guidance that eliminates the detailed review requirement. We examined the legislative history of the SRB program and OSD and service regulations for the program. We also interviewed OSD and service representatives to determine their policies on designating SRB skills, awarding SRBs, and paying of VSI and SSB to servicemembers in SRB skills. We analyzed information provided by the services from a number of databases to determine the following for fiscal years 1993 and 1994: the number and cost of new SRBs awarded by skill, fill rates at the beginning of the year for skills receiving SRBs, the number and cost of SRBs awarded to skills with high fill rates, and the number of VSIs and SSBs given to personnel in skills eligible for SRBs. We did not perform a reliability assessment of the databases from which the services provided us data. However, we compared the information provided us to that contained in service reports and discussed the information with service officials to ensure it provided a reasonable and accurate profile of individuals receiving SRBs, the fill rates for SRB skills, and VSI and SSB recipients. Our review was conducted from June 1994 to October 1995 in accordance with generally accepted government auditing standards. Please contact me at (202) 512-5140 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix II. The following are GAO's comments on the Department of Defense's letter dated September 28, 1995. 1. While there may have been other contributors, the drawdown was the main reason for the reductions cited by service Selective Reenlistment Bonus (SRB) program managers and stated in service budget justification documents submitted to Congress. In its budget documents over this period, the Navy stated that "the number of new payments declined . . . due to force structure reductions." In discussing the declining total cost of new SRB contracts, the Air Force reported in its budget documents to Congress that ". . . the overall drawdown of the force is a contributing factor to the lower totals . . ." In addition, SRB program managers in all four services told us that, generally speaking, the declining total cost of new SRB contracts resulted from the drawdown. 2. As of September 1995, the Navy had 989 Independent Duty Corpsmen (IDC) against an authorization of 981 billets, a fill rate of over 100 percent. The Navy has requirements for an IDC functioning as the sole medical care provider on 231 of its approximately 372 ships. Even in the unlikely scenario that all 231 ships were deployed at one time, the Navy should have no trouble providing the 231 IDCs from its inventory of nearly 1,000 IDCs. 3. While Navy data shows that the first-term retention rate for Gas Turbine Mechanics (GSM) declined from 63.3 percent to 37.8 percent during fiscal year 1994, there is no apparent relationship between the decline and the SRB program. When the Navy reduced the first-term SRB award payment for GSMs by nearly two-thirds over the course of fiscal year 1991, the first-term retention rate actually increased to 57.6 percent from 53.9 percent during the year. With the SRB award to first-term GSMs maintained at the reduced payment level, retention rates were 68.2 percent and 63.3 percent at the end of fiscal years 1992 and 1993, respectively. According to Navy officials, the drop in reenlistment of first-term GSMs that occurred in fiscal year 1994 was the result of a perception among personnel within that skill area that, because of reduced ship construction and possible ship decommissionings, there was no future in the GSM rating. Despite the drop in the first-term reenlistment rate, as of September 1995, the Navy had an inventory of 2,974 GSMs against an authorization of 2,871 billets, a fill level of over 100 percent. Janet Keller, Evaluator-in-Charge Sharon Reid, 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. 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 reviewed whether the Department of Defense (DOD) has effectively managed the Selective Reenlistment Bonus (SRB) Program. GAO found that: (1) the services have awarded some SRB to personnel in high-skill categories where a high percentage of the required positions are already filled; (2) in fiscal year (FY) 1994, 43 percent of the new SRB contracts went to service members in skill categories where 90 percent or more of the required positions were filled and in which many higher skill level service members were paid incentives to leave the service; (3) each SRB program is targeted to different segments of the military, including personnel in different grades and year groups; and (4) the Office of the Secretary of Defense has not provided adequate oversight of the SRB program, having performed only one skills review in FY 1991.
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A rare pediatric disease, as defined by statute, is one that primarily affects children 18 years and younger and generally affects fewer than 200,000 individuals in the United States. Some diseases affect less than a handful of children, while others affect many more. In many cases, no FDA-approved therapy exists for the treatment of the disease. Drug development is inherently challenging, and developing drugs to treat rare pediatric diseases adds layers of complexity. The drug development process in general is time-consuming and costly for drug sponsors. The drug industry estimates that, on average, a sponsor spends over a decade developing a drug at an average cost of $2.6 billion. The industry also reports that the percentage of drugs that enter clinical trials and that are eventually approved by FDA as safe and efficacious is less than 12 percent. Many more drugs will fail and prove to be either unsafe or ineffective at the earlier, preclinical stage. Developing drugs to treat rare pediatric diseases is even more challenging for several reasons. By definition, the number of patients affected by any individual rare disease is small, making it difficult to understand a disease's progression and to design studies for potential new drugs. For example, FDA has pointed out that this challenge is further compounded in drug development for children, as they represent a smaller percentage of the overall population, which makes it difficult to identify and recruit sufficient numbers of patients to include in studies. The agency further notes that conducting these studies is difficult because the manifestation and progression of the same rare disease can vary by patient. There can also be different sub- types of a single disease, which can further reduce the number of patients to study. Further, there are relatively few researchers who are knowledgeable about a particular rare disease, which makes designing studies challenging. In addition, according to drug sponsors, there may be a greater incentive for them to focus on developing drugs for large patient populations that produce higher returns on investment than drugs for smaller patient populations that may generate less revenue. As a result of these challenges and others, drug sponsors may be hesitant to attempt to develop drugs to treat rare pediatric diseases. FDA, an agency within the Department of Health and Human Services (HHS), is responsible for overseeing the safety and efficacy of drugs sold in the United States. This responsibility includes the implementation of the pediatric voucher program, as provided for in FDASIA. FDA may award a drug sponsor a voucher upon approval of that sponsor's new drug application for a rare pediatric disease. Specifically, the drug must be for the prevention or treatment of a rare disease that primarily affects children 18 or under. The application may include the same indication for use in adults with the same rare pediatric disease, but it cannot include a different adult indication. Other criteria must also be met in order to receive a voucher. For example, the drug must not contain an active ingredient that has been previously approved by FDA in another drug application, and the drug must be eligible for priority review. New drug applications that FDA determines not to qualify for a priority review, and which therefore receive a standard review, are ineligible to receive a pediatric priority review voucher. If a drug meets the eligibility criteria, the drug sponsor should include a request for a pediatric voucher in its new drug application, including supporting documentation demonstrating how the application meets the eligibility criteria for a pediatric voucher. Alternatively, if a drug sponsor does not submit a request for a pediatric voucher, but FDA determines that the sponsor may be eligible to receive one, FDA notifies the drug sponsor of its possible eligibility. Once FDA receives a sponsor's new drug application and pediatric voucher request, it reviews the information and considers whether it should be approved. If FDA approves the drug application, it includes its decision regarding whether to award a pediatric voucher in its approval letter. In making this decision, FDA determines whether the drug sponsor has met all of the eligibility criteria for a pediatric voucher, which includes determining that the drug is for a rare pediatric disease as well as reviewing the clinical data examining the drug's use in a pediatric population included in the drug application. Once a drug sponsor is awarded a voucher, it can later be redeemed by that sponsor with the submission of another new drug application for a drug to treat any disease or condition in adults or children, making the sponsor automatically eligible for a 6-month priority review. The original drug sponsor also has the option of selling or transferring the voucher to a new drug sponsor, who may then choose to use the voucher or similarly sell or transfer it. The voucher may be transferred any number of times before it is used. When the sponsor who possesses the voucher ultimately decides to redeem it, the sponsor must notify FDA at least 90 days in advance of submitting the new drug application. The sponsor redeeming the voucher must also pay any other required user fees. Figure 1 provides a general overview of the pediatric voucher program. Before submitting a new drug application, a sponsor may also request a rare pediatric disease designation for a drug that is still in development. This designation was established as part of the pediatric voucher program in 2012. In its designation request, a sponsor is to include information about, among other things, the drug and the rare pediatric disease for which the drug is being investigated, and the basis for concluding that the disease is rare and primarily affects children. FDA reviews the provided information and generally informs a drug sponsor of its designation decision within 60 days of receiving the request. FDA encourages drug sponsors to request such a designation in order for the agency to have the necessary information to evaluate a drug's pediatric voucher eligibility and to ensure that drug sponsors have an adequate opportunity to provide this information before requesting a voucher. However, requesting such designation is not required in order to receive a rare pediatric disease voucher. If a rare pediatric disease designation is not requested prior to a drug sponsor submitting its new drug application, FDA officials may determine through their reviews of a new drug application and discussions with a drug sponsor that a certain drug may be eligible for a voucher. FDA officials will ask the drug sponsor to submit the necessary information to demonstrate that the drug is for a rare pediatric disease as, according to FDA, that information is generally not included in a new drug application. Given that the typical drug development process often exceeds a decade, insufficient time has elapsed to gauge whether the 3-year-old pediatric voucher program has been effective at encouraging the development of drugs for rare pediatric diseases. We found that each of the drugs awarded pediatric vouchers were in development prior to the voucher program's implementation. Any sponsors motivated by this relatively new program to attempt to develop drugs for such diseases would likely be years away from submitting their new drug applications to FDA. Although it is too early to gauge whether the program stimulates drug development, a potential indication of sponsor interest in the program may be reflected by the number of requests that have been submitted for a pediatric voucher or a rare pediatric disease designation. We examined how many requests for pediatric vouchers and rare pediatric disease designation were submitted to FDA and how many of these vouchers were awarded and designations were granted. As of December 31, 2015, there have been 11 requests for a pediatric voucher. Of these, 6 have been awarded, 2 denied, and 3 are still under review. The fact that the sponsors of these drugs took the steps to request vouchers and demonstrate their eligibility--either on their own initiative or in response to FDA's suggestion--suggests interest in the program. Similarly, taking steps to demonstrate that their drugs are intended to treat rare pediatric diseases and requesting such designations also indicates that these sponsors are considering applying for a pediatric voucher. Since the pediatric voucher program and designation were established, through December 31, 2015, there have been 52 rare pediatric disease designations requested and 29 granted. Because requests for a rare pediatric disease designation can be submitted at any time in the drug development process prior to submitting a new drug application, these designations could be for drugs that, for example, are in early stages of development and were pursued specifically in response to the program. Alternatively, these designations could be for drugs that were being studied before FDASIA was enacted and thus are farther along in the development process. According to FDA, the agency does not track which stage of development a drug is in when a request for this designation is submitted. The six drugs for which pediatric vouchers were awarded helped fulfill an unmet medical need. Specifically, these six drugs were the first drugs approved by FDA to treat the seven rare pediatric diseases for which they are indicated. No other drugs had been previously approved for these diseases. Vimizim, sponsored by BioMarin Pharmaceutical, treats children with Mucopolysaccharidosis Type IVA, a rare inherited metabolic disorder resulting from an enzyme deficiency. According to FDA and NIH, the drug significantly improves patients' ability to walk. Unituxin, sponsored by United Therapeutics, is intended to help patients with high-risk neuroblastoma, a rare pediatric cancer, and, according to FDA, improves the overall survival rates of affected children. Cholbam, sponsored by Asklepion Pharmaceuticals, is considered by relevant patient advocacy groups to be an effective and important therapy for children with some bile acid synthesis disorders and some peroxisomal disorders, both of which are metabolic disorders. Xuriden, sponsored by Wellstat Therapeutics, allows certain children with hereditary orotic aciduria--an extremely rare, genetic metabolic disorder--to live life unimpeded by the disease as long as they continue treatment, according to FDA. Strensiq, sponsored by Alexion Pharmaceuticals, is for use by children suffering from hypophosphatasia, a genetic, rare metabolic disorder. FDA and physicians reported that the drug increased survival rates and alleviated symptoms among children in clinical trials. Kanuma, also sponsored by Alexion Pharmaceuticals, is for use by patients with lysosomal acid lipase deficiency, a rare, genetic, progressive metabolic disorder. According to FDA, the drug demonstrated increased life expectancy in a clinical trial among children who were diagnosed as infants. Officials from both NIH and FDA agree that these drugs are meaningful for patients with the rare pediatric diseases as the drugs may, for example, increase life expectancy, alleviate certain symptoms, or otherwise improve quality of life. Similarly, patient advocacy groups and physicians said that these drugs provide important new treatment for patients and improve survival rates and symptoms. (See app. II for a summary about each of these diseases based on information available from NIH, patient advocacy groups, and physicians familiar with these diseases.) As of December 31, 2015, four of the six pediatric vouchers--for Vimizim, Unituxin, Cholbam, and Xuriden--have been sold or transferred to other drug sponsors. Sale prices of the pediatric vouchers have ranged from $67.5 million to $350 million. The other two awarded vouchers--for Strensiq and Kanuma--remain held by the original sponsor. Only the voucher awarded for Vimizim has been redeemed. It was used to expedite the review of Praluent, a new drug to treat adults with high cholesterol. See table 1 for more detailed information about the status of these vouchers. FDA officials expressed concern about the pediatric voucher program, and do not support its continuation after its current authorization expires October 1, 2016. In written responses to our questions, FDA officials reported that they have seen no evidence that the program has encouraged increased development of drugs for rare pediatric diseases. The agency also indicated that while it strongly supports the goal of the program--incentivizing the development of drugs for rare pediatric diseases--it has not seen evidence that the program has yet been effective in achieving this goal. Instead, the agency suggested that companies may consider that other incentives, such as provision of an additional period of "market exclusivity," may be more effective at incentivizing drug development than the priority review vouchers. FDA specifically cited its authority to provide an additional 6 months of market exclusivity for FDA requested pediatric studies in products that may produce health benefits in the pediatric population--known as pediatric exclusivity--as providing an effective incentive to drug sponsors. In addition to sharing its views regarding the program's effectiveness in incentivizing drug development, FDA cited concerns about what it considers to be the significant adverse impact of the program on the agency's ability to determine its public health priorities. According to FDA, the program interferes with its ability to set priorities on the basis of public health needs by requiring FDA to provide priority reviews of new drug applications that would not otherwise qualify, based on the merits of those applications. The agency noted that an application for a drug will receive priority review designation if it is for a drug that treats a serious condition and, if approved, would provide a significant improvement in safety or effectiveness. However, FDA anticipates that sponsors will seek to redeem their vouchers for new drug applications that would otherwise receive a standard 10-month review for more prevalent conditions that already have available treatments. Such applications may be for drugs to treat diseases or conditions such as elevated blood pressure, high cholesterol, obesity, or diabetes and other drugs with substantial market potential. FDA explained that, in effect, the program allows sponsors to "purchase" a priority review at the expense of other important public health work in FDA's portfolio, which undermines FDA's public health mission and the morale of its professional review staff. According to FDA, the pediatric voucher program also places a substantial strain on its workload. First, the agency explained that performing a priority review on a drug that would otherwise merit a standard review requires the agency to conduct significant work in a compressed timeframe. FDA pointed out that, while patients and providers are willing to accept a greater risk for a drug that fulfills an unmet medical need, there is a different benefit risk balance that must be considered when assessing drugs for more prevalent conditions that may be used in millions of patients. A new drug application qualifying for a standard review is typically accompanied by very large data sets, reflective of the study of thousands of patients to support substantial evidence of the drug's effectiveness and to provide the safety data required to demonstrate that its benefits outweigh its risks. As a result, 6- month priority reviews of applications that would otherwise receive a 10- month standard review require FDA to conduct work in 4 months less time. FDA noted that, in order to meet the required shortened timeframe for review, staff must divert attention from other important work or management must assign more reviewers to review an application. FDA noted that it confronted this challenge and had to curtail or defer other important work with the first redemption of a pediatric voucher for Praluent. Second, FDA indicated that the pediatric voucher program hinders its ability to effectively manage its own workload. FDA pointed out that it is organized into separate review divisions with specific areas of expertise and that it cannot quickly train new staff. There is not a pool of review staff that can be moved from one review division to another review division on an ad hoc basis to complete priority reviews for the application based on the rare pediatric review vouchers. According to FDA, it cannot predict which review divisions will need additional staff to complete the additional priority reviews, making anticipatory hiring infeasible. Although FDA receives a special user fee from a drug sponsor when the sponsor redeems a voucher, in addition to the regular user fee that accompanies a new drug application, the agency noted that FDASIA did not authorize resources beyond the user fees--funding or staff--to administer the program, including determining rare pediatric disease designations. FDA noted that there is a disconnect in the timing of its collection of the additional user fee and the time it takes the agency to hire, orient, and train additional reviewers to assist with the additional reviews. Furthermore, the additional user fee is a one-time payment and does not provide the funding needed to sustain the longer-term employment of additional staff hired to assist with conducting the priority review. While the additional user fee is intended to compensate for FDA's increased workload related to redemption of the vouchers, FDA noted that the funding mechanism does not provide the agency the resources required to review the particular voucher priority application. FDA told us that, if the number of pediatric vouchers awarded and redeemed continues to increase, the agency's ability to meet its public health mission and other commitments will be adversely affected, including monitoring postmarket safety, engaging with patient and stakeholder groups, and advising drug sponsors on their development programs, including those focused on pediatric drugs. Third, in a discussion with FDA, officials said that the pediatric voucher program has also significantly increased its workload due to its need to respond to requests for rare pediatric disease designations, often within 60 days, and the complexity involved in making such determinations. Determining whether to designate a drug as one for a rare pediatric disease is challenging; FDA officials told us that the vast majority of initial requests for such designation have not included adequate information to demonstrate that the disease primarily affects children 18 years and younger. As a result, FDA must work with the drug sponsor to determine what types of information are acceptable to support such an assertion. Feedback from stakeholders about the pediatric voucher program varied but has been generally positive, with nearly all drug sponsors and patient advocacy groups we spoke with saying that the program could potentially motivate further research in rare pediatric diseases. Drug sponsors largely favor the program; one sponsor and half of the patient advocacy groups with whom we spoke pointed to the sales of and prices for the vouchers as evidence that demand for the vouchers exists. Most sponsors also noted that each sale provides cash infusions for drug sponsors who were initially awarded--and later sold--the vouchers. Four of five sponsors that were awarded or transferred and later sold vouchers told us that they plan to reinvest a portion of the proceeds they received into additional research and development of drugs to treat other rare pediatric diseases. However, there is no requirement that sponsors must use the proceeds in this way. A few sponsors said that the program will be a factor in future business decisions and most said that it will likely encourage the development of drugs for treating rare pediatric diseases if it is reauthorized. Patient advocacy groups also generally favor the program. For example, one group we spoke to said that the program has stimulated a transfer of cash from larger drug sponsors to smaller ones through the sales of the vouchers, and that these smaller drug sponsors may reinvest a portion of the proceeds to continue developing drugs for rare pediatric diseases. A few groups also indicated that the program could lead to the development of much-needed pediatric drugs without costing the government resources. Most told us that they believe the program incentivizes drug development. A few groups told us that, since the creation of the program, they have spoken with several drug sponsors interested in discussing the extent to which their drugs in development might be able to treat the patients that these groups represent. Although sponsors and patient advocacy groups were generally positive about the voucher program, some also expressed concerns related to the uncertain future of the program and FDA's interpretation of what diseases are considered rare pediatric diseases, concerns also expressed by organizations representing physicians and the health insurance industry. For example, some of the sponsors, patient advocacy groups, and other organizations that we contacted said that the FDASIA provision providing for termination of FDA's authority to award pediatric vouchers one year after the award of the third voucher under the program (March 2016) created ambiguity for industry that therefore diminishes the program's appeal. Specifically, two drug sponsors told us that they are concerned about pursuing lengthy and costly drug development for rare pediatric diseases in order to obtain a voucher that may be unavailable by the time they are ready to submit new drug applications to FDA. To enhance the program's effectiveness, most drug sponsors and many patient advocacy groups said that they believe the program should be reauthorized for a longer period of time, or even permanently. Additionally, a drug sponsor and a few patient advocacy groups told us that, in their view, FDA's interpretation of the definition of a rare pediatric disease is too narrow. Some said that as a result, certain rare diseases, such as sickle cell disease and some pediatric cancers, are not eligible for a pediatric voucher because more than 50 percent of afflicted children survive to adulthood. One patient advocacy group indicated that such an exclusion effectively penalizes all patients with these diseases because a majority of them live past 18 years, although the onset of the disease occurs during childhood. They told us that they believe such diseases should be included in FDA's definition. When asked about how the agency determined its definition of a rare pediatric disease, FDA officials pointed out that a vast majority of rare diseases are diagnosed in childhood-- given this, products for all rare diseases diagnosed at that time would be eligible for a voucher. However, since children were to be the intended population for pediatric voucher program per FDASIA, FDA officials noted that, by law, the definition applies to those diseases that primarily affect children 18 years and younger. Several drug sponsors and a patient advocacy group raised some concerns about the program but were uncertain about how to address them. For example, certain drug sponsors and the patient advocacy group suggested that there might be an optimal number of vouchers to be awarded to maximize their value to industry and their incentivizing effect. The patient advocacy group suggested that awarding too many vouchers would cause their value to plummet. However, most of them were uncertain about what the optimum quantity of awarded vouchers should be. In addition, similar to a concern raised by FDA, one drug sponsor told us that it was concerned that incentivizing development of drugs for rare pediatric diseases could potentially lead to unintended consequences, such as diverting attention from mass-market diseases such as diabetes. Finally, feedback from organizations representing physicians, health insurers, and children's hospitals about the pediatric voucher program was varied. While two of these organizations generally favored the program, all told us that there was insufficient information to judge the program's overall effectiveness or that it was simply too soon to tell. One organization shared FDA's concerns about potential unintended consequences, such as the diversion of resources from other agency priorities. Feedback from the academic community was also varied. One academic told us that the voucher program has been consistent with his expectations and echoed what a few patient advocacy groups said--that the program could be a stimulant for developing drugs for rare pediatric diseases at little cost to the federal government. In contrast, another academic said it was difficult to determine whether the program stimulated research since only a few years have elapsed since the program was implemented. He indicated, similar to FDA's concern, that the program could instead lead to unintended consequences. For example, this academic suggested that the program could strain FDA resources, commoditize its approval process, and result in the granting of a priority review to a drug that is neither novel nor fulfills an unmet medical need. He also proposed that, if the pediatric voucher program is reauthorized it could be improved by delaying the awarding of the vouchers until several years after the drugs' approval. This would allow more time to assess whether patients have actually benefitted from the drugs, and are able to access the drugs, before the voucher is awarded. We provided a draft of this report for comment to HHS. HHS provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees and the Secretary of Health and Human Services. 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) 512-7114 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 III. 1. American Academy of Pediatrics 2. Children's Hospital Association 3. America's Health Insurance Plans 4. Jerry Vockley, MD., Ph.D. Professor of Pediatrics and Human Genetics University of Pittsburgh 5. Dr. David Ridley Duke University The Fuqua School of Business Faculty Director of the Health Sector Management Program 6. Aaron S. Kesselheim, M.D., J.D., M.P.H. Pediatric patients affected by seven diseases that previously had no approved treatment may now benefit from six newly-approved drugs for which pediatric vouchers were awarded. We have summarized information about each of these diseases obtained from the National Institutes of Health's Genetics Home Reference, patient advocacy groups, and physicians familiar with these conditions. Mucopolysaccharidosis type IVA, also known as Morquio A Syndrome, is a rare, progressive, hereditary disease that mainly affects the skeleton and can lead to paralysis and early death. Genetic mutations reduce or eliminate the activity of certain enzymes that are involved in the breakdown of large sugar molecules, resulting in the accumulation of such molecules to toxic levels in many tissues and organs, particularly in the bones, causing deformities. Affected individuals typically demonstrate signs of the disease during early childhood, including skeletal abnormalities such as knock knees, short stature, and abnormalities of the chest, hips, ribs, spine, and wrists. Other symptoms may include vision loss; hearing loss; frequent upper respiratory infections; thin tooth enamel and multiple cavities; heart valve abnormalities; and a mildly- enlarged liver. Morquio A Syndrome does not affect intelligence. Although the exact prevalence of Morquio A Syndrome is unknown, it is estimated that the broader condition--Mucopolysaccharidosis type IV-- occurs in approximately 1 in every 200,000 to 300,000 individuals. The life expectancy of individuals with Morquio A Syndrome depends on the severity of symptoms, with the most severely affected patients surviving only until late childhood or adolescence. Individuals with milder forms of the disorder may live into adulthood, although their life expectancy may be reduced. Vimizim (elosulfase alfa), is the first FDA-approved drug for the treatment of Morquio A Syndrome. No other FDA-approved therapies exist for treatment of this disease. Neuroblastoma, a type of pediatric cancer that occurs when immature nerve cells become abnormal and multiply uncontrollably, most often occurs in children before age 5 and rarely occurs in adults. Most commonly, a tumor forms in the adrenal gland located above each kidney and can spread to other parts of the body such as the bones, liver, or skin. Tumors also commonly grow in the nerve tissue in the abdomen, chest, neck, or pelvis. Individuals with neuroblastoma may exhibit symptoms such as fever, irritability, pain, tiredness, diarrhea, loss of appetite, and weight loss. Some symptoms may be location-specific, such as a tumor in the abdomen causing abdominal swelling; a tumor in the chest causing difficulty breathing; and a tumor metastasizing to the bone causing bone pain, bruises, and pale skin. Neuroblastoma occurs in approximately 1 in every 100,000 children and is diagnosed in about 650 children each year in the United States. It is the most common cancer in infants younger than 1 year. Only 40 to 50 percent of children with high-risk neuroblastoma live at least 5 years after diagnosis. Unituxin (dinutuximab) is the first FDA-approved drug for the treatment of high-risk neuroblastoma. There are currently other FDA-approved drugs for neuroblastoma (specifically, Cyclophosphamide, Vincasar PFS, and Doxorubicin Hydrochloride); however, none of these were approved specifically for the treatment of patients with high-risk neuroblastoma. Bile acid synthesis disorders are a group of rare metabolic disorders characterized by impaired production and release of a digestive fluid, called bile, from liver cells. People with bile acid synthesis disorders cannot produce bile acids, which are a component of bile that stimulate bile flow and help it absorb fats and fat-soluble vitamins, such as vitamins A, D, E, and K. Consequently, an abnormal form of bile is produced. The failure to produce normal or functional bile acids results in the accumulation of abnormal bile acids and other substances that normally would be broken down within the body, leading to deterioration of certain organ systems. Symptoms may include interruption or suppression of the flow of bile from the liver, fat-soluble vitamin malabsorption, progressive neurological disease, and liver disease. Bile acid synthesis disorders are estimated to occur in between 1 to 9 individuals in every 1,000,000 births. If left untreated, the disorders may lead to cirrhosis of the liver and death in childhood. Cholbam (cholic acid) is the first FDA-approved drug for the treatment of bile acid synthesis disorders due to single enzyme defects. No other FDA-approved therapies exist for these disorders. Peroxisomal disorders are a group of metabolic disorders, including those in the Zellweger spectrum. These systemic diseases, which affect multiple organs and may have neurological manifestations, present as rare autosomal recessive disorders with impairment of production and release of digestive fluid, called bile, from liver cells. Bile is used during digestion to absorb fats and fat-soluble vitamins, such as vitamins A, D, E, and K. Individuals with the most severe forms of this disease develop symptoms of the condition as newborns, and experience weak muscle tone, feeding problems, hearing and vision loss, and seizures. They may also develop life-threatening problems in other organs and tissues, such as the liver, heart, and kidneys, and may have skeletal abnormalities. Affected individuals have distinctive facial features, including a flattened face and broad nasal bridge. Individuals with less-severe forms of the disease may not develop signs of the disease until late infancy or early childhood. They may have many of the same features as those patients with severe cases; however, their conditions typically progress more slowly. Children with these less-severe conditions often exhibit developmental delays and intellectual disability. Zellweger spectrum disorders (a subset of peroxisomal disorders) are estimated to occur in approximately 1 in every 50,000 individuals. Peroxisomal disorders encompass a spectrum of disorders, which means the life expectancy of a patient depends on the severity of his or her disease. Patients diagnosed with the most severe form typically do not live beyond 1 year. Children with less severe forms generally live until 10 years of age, although there have been cases reported of children living longer. Cholbam (cholic acid) is the first FDA-approved drug for the treatment of peroxisomal disorders (including Zellweger spectrum disorders). No other FDA-approved therapies exist for these disorders. Hereditary orotic aciduria is an extremely rare, potentially life-threatening, genetic disorder in which patients cannot produce adequate amounts of uridine, a component of ribonucleic acid that is involved in the synthesis of protein in the body. Patients with inadequate amount of uridine can suffer from blood abnormalities, failure to thrive, a range of developmental delays, and episodes of crystal formation in the urine leading to obstruction of the ureter (a tube that carries urine from the kidneys to the bladder), causing urine to back up into the kidney, making it swell. Hereditary orotic aciduria is extremely rare, with only four known patients with this disease in the United States, and an estimated 20 worldwide. Left untreated, the disease can contribute to early mortality. Xuriden (uridine triacetate) is the first FDA-approved drug for the treatment of hereditary orotic aciduria. No other FDA-approved therapies exist for this disease. Hypophosphatasia is a rare, genetic, progressive, metabolic disease in which patients experience devastating effects on multiple systems of the body, leading to severe physical disability and life-threatening complications. With a spectrum of symptoms and severity, the disease is characterized by defective bone mineralization and softening of the bones. Though forms of hypophosphatasia may appear in childhood or adulthood, the most severe forms tend to occur before birth and in early infancy. Affected newborns exhibit short limbs, an abnormally-shaped chest, and soft skull bones. Additional complications in infancy include poor feeding, a failure to gain weight, respiratory problems, and high levels of calcium in the blood that may lead to kidney problems. Early loss of primary (baby) teeth is one of the first signs of the condition in children. Affected children may have short stature with bowed legs or knock knees, enlarged wrist and ankle joints, and an abnormal skull shape. Afflicted individuals may exhibit delayed development with traditional milestones such as sitting, crawling, or walking. Severe forms of hypophosphatasia are estimated to occur in approximately 1 in every 100,000 births. Milder cases, such as those that appear in childhood or adulthood, may occur more frequently. The life expectancy of a patient depends on which form of hypophosphatasia (perinatal, infantile, juvenile, or adult) he or she has. The life expectancy of those with the most severe form, perinatal hypophosphatasia, is measured only in days or weeks. Strensiq (asfotase alfa) is the first FDA-approved drug for the treatment of perinatal, infantile, and juvenile-onset hypophosphatasia. No other FDA- approved therapies exist for this disease. Lysosomal acid lipase deficiency is an inherited spectrum condition in which affected individuals are unable to properly breakdown and use fats and cholesterol in the body. The condition ranges from the infantile-onset form (Wolman disease) to later-onset forms (known as cholesteryl ester storage disease). In affected individuals, harmful amounts of fats may accumulate in areas such as the spleen, liver, bone marrow, and small intestine. Chronic liver disease can develop, along with accumulation of fatty deposits in the arteries. The deposits may eventually block the arteries, which may increase the chance of having a heart attack or stroke. The symptoms of lysosomal acid lipase deficiency are highly variable. Individuals in which onset occurs later in life may experience mild symptoms that are undiagnosed until late adulthood, while those with early onset of the disease may have liver dysfunction in early childhood. Infants with Wolman disease may demonstrate an enlarged liver and spleen, poor weight gain, low muscle tone, jaundice, vomiting, diarrhea, developmental delay, anemia, and poor absorption of nutrients from food. Wolman disease is estimated to occur in 1 in 350,000 newborns. Children affected by Wolman disease develop severe malnutrition and generally do not survive past early childhood. Comparatively, about 50 individuals affected by cholesteryl ester storage disease have been reported worldwide, and the lifespan of these individuals depends on the severity of the associated complications. Kanuma (sebelipase alfa) is the first FDA-approved drug for the treatment of lysosomal acid lipase deficiency. No other FDA-approved therapies exist for this disease. In addition to the contact named above, Geri Redican-Bigott, Assistant Director; George Bogart; Muriel Brown; Kaitlin Coffey; Jesse S. Elrod; and Cathleen Hamann made key contributions to this report.
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Almost 7,000 rare diseases, most of which are serious or life-threatening, affect more than 25 million Americans. About half of all rare diseases affect children, and few of these diseases have viable treatments. To encourage the development of drugs to treat or prevent rare pediatric diseases, the Food and Drug Administration Safety and Innovation Act (FDASIA) of 2012 authorized FDA to award a priority review voucher to a drug sponsor upon approval of that sponsor's drug to treat a rare pediatric disease. A drug sponsor can later redeem the voucher when submitting another new drug application to treat any disease or condition in adults or children, or sell or transfer the voucher to another sponsor. A voucher entitles a sponsor to a 6-month priority review by FDA rather than the 10-month standard review. FDASIA included a provision for GAO to study the pediatric voucher program. GAO examined what is known about the effectiveness of the program in encouraging the development of drugs to prevent or treat certain rare pediatric diseases. GAO reviewed relevant laws and documentation related to the program and its management, and identified drug sponsors who were awarded vouchers, the diseases their drugs were approved to treat, and whether the vouchers were redeemed, sold, or transferred. GAO also interviewed FDA officials, drug sponsors, patient advocacy groups, and organizations representing physicians and children's hospitals, among others. It is too early to gauge whether the Food and Drug Administration's (FDA) pediatric voucher program has stimulated the development of drugs to treat or prevent rare pediatric diseases. Given that the typical drug development process often exceeds a decade, insufficient time has elapsed to determine whether the 3 year-old program has been effective. Any drug sponsors motivated by the program to attempt to develop a drug for a rare pediatric disease may be many years from submitting new drug applications--which contain scientific and clinical data about safety and effectiveness--to FDA for review. As of December 31, 2015, there have been 11 requests for a pediatric voucher. Of these, six have been awarded, two denied, and three remain under review. The six drugs for which vouchers were awarded were in development prior to the program's implementation and these drugs helped fulfill unmet medical needs. One drug is indicated to treat a rare pediatric cancer, and the other five drugs treat rare metabolic diseases affecting children. No other drugs had been previously approved by FDA for these conditions. Four of the six awarded pediatric vouchers have been sold to other drug sponsors for prices ranging from $67.5 million to $350 million. One of the six vouchers awarded has been redeemed and was used to obtain a priority review of a new drug application for a drug to treat adults with high cholesterol. FDA approved this new drug application in July 2015. FDA officials stated that, while they strongly support the goal of incentivizing drug development for rare pediatric diseases, they have seen no evidence that the program is effective. The program's authorization, as amended, is set to terminate October 1, 2016, and FDA officials said they do not support the program's continuation. They expressed concern that the program adversely affects the agency's ability to set its public health priorities by requiring FDA to provide priority reviews of new drug applications that would not otherwise qualify if they do not treat a serious condition or provide a significant improvement in safety or effectiveness. Additionally, FDA officials said that the additional workload from the program strains the agency's resources. However, other stakeholders provided generally positive feedback on the program. For example, drug sponsors that sold these vouchers said they plan to reinvest portions of the proceeds they received into additional research on rare pediatric diseases, although there is no requirement to do so. Patient advocacy groups told GAO that the program could lead to the development of needed drugs. We provided a draft of this report for comment to the Department of Health and Human Services (HHS). HHS provided technical comments, which we incorporated as appropriate.
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In 1986, a report to the President on defense management concluded that the defense industry needed to promote principles of ethical business conduct, detect acts of procurement fraud through self-governance, and voluntarily report potential fraud to the government. The report noted that DOD awarded contracts worth about $164 billion in 1985, 70 percent of which went to a group of 100 contractors. Twenty-five contractors reportedly did business of $1 billion or more, 147 contractors did $100 million or more, and almost 6,000 contractors did $1 million or more. In fiscal year 1994, the number of contractors doing business with DOD did not substantially change. Total DOD contracting for goods and services over $25,000 in fiscal year 1994 amounted to $118 billion. In response to the 1986 report, a number of defense contractors established self-governance programs that included monitoring compliance with federal procurement laws and voluntarily disclosing violations to government authorities. These efforts became known as the Defense Industry Initiative on Business Ethics and Conduct. To facilitate contractor self-governance and to encourage contractors to adopt a voluntary disclosure policy, DOD established the Voluntary Disclosure Program in July 1986. This program provides general guidelines, policy, and processes to enable DOD and its contractors to address matters of wrongdoing the contractors discover. At the time, DOD recognized that there was a need for a process to deal in a consistent manner with matters disclosed by contractors. In return for voluntarily disclosing potential wrongdoing and cooperating in any government audit and investigation, the government generally allows a contractor to conduct its own investigation, which the government then attempts to verify expeditiously. Upon receipt of an initial contractor disclosure, the DOD Inspector General's office (1) makes a preliminary determination as to whether the disclosure satisfies the program's requirements, (2) coordinates the execution of the standard voluntary disclosure agreement, (3) assigns the disclosure to a DOD criminal investigative organization for verification and to a suspension and debarment authority, and (4) coordinates the disclosure with the Justice Department for potential civil and criminal action. The Justice Department reviews all voluntary disclosures. It conducts, either through its Defense Procurement Fraud Unit or through referral to the appropriate U.S. Attorney's Office, a preliminary inquiry to determine if there is credible evidence suggesting prosecutable violation of federal laws. The Justice Department has sole responsibility to initiate or decline prosecution. It also has an opportunity to concur in the voluntary disclosure agreement between the contractor and DOD. Acceptance of a voluntary disclosure into the program by DOD is based on four criteria. The contractor voluntarily disclosing the potential fraudulent action must (1) not be motivated by the recognition of imminent detection, (2) have status as a business entity, (3) take prompt and complete corrective actions, and (4) fully cooperate with the government in any ensuing investigation or audit. The number of voluntary disclosures under the program has been relatively small and the dollar recoveries have been modest. From its inception in 1986 through September 1994, DOD reported that 138 defense contractors made 325 voluntary disclosures of potential procurement fraud, of which 129 have been closed. According to DOD, 48 of the top 100 defense contractors made 222 disclosures. The remaining 103 disclosures were made by 90 contractors from among the more than 32,000 contractors doing business with DOD. Many contractors were one-time users, but one large contractor accounted for 23 of the closed cases. Figure 1 shows the annual number of disclosures reported since the program's inception. Acceptance into the program has its benefits for contractors. For example, a contractor can expect (1) its liability in general to be less than treble damages, (2) action on any suspension to be deferred until after the disclosure is investigated, (3) the overall settlement to be coordinated with government agencies, (4) the disruption from adversarial government investigations to be reduced, and (5) the information may be kept confidential to the extent permitted by law and regulation. The program also benefits the government. For example, DOD commented that the existence of a structured format for addressing contractual and legal violations encourages contractor ethics and internal review programs. The Justice Department pointed out that the program promotes corporate compliance with laws and regulations. According to DOD, the key to deciding if a disclosure is voluntary is whether a contractor was aware of information the government possessed or was about to discover, thus motivating the contractor to make a disclosure. In a 1992 DOD review of the program, DOD noted cases in which it had determined that contractors' disclosures were eligible for admission into the program, but the Justice Department disagreed and recommended that the disclosures not be admitted into the program. In 1992, when this disagreement was noted, the Justice Department proposed that it and DOD establish a working group to resolve the issue. To date, we were told, this has not occurred. According to officials from the two departments, disagreements continue over whether some disclosures should be admitted into the program. In fact, two of the three cases that were the basis of the concerns reflected in the 1992 review remain in the program as open cases, and the Justice Department still has not concurred with DOD's acceptance of these disclosures into the program. The disagreement between the two departments revolves around whether disclosures were triggered by knowledge of imminent discovery by the government. In this regard, DOD believes that it is its prerogative, not the Justice Department's, to accept or reject a contractor's voluntary disclosure. DOD stated that it did not always agree with the Justice Department on whether a company should be admitted into the program. However, DOD stated that it and the Justice Department have worked well together in resolving the questions on a factual basis and that this cooperation has grown significantly over the last 2 years. DOD stated that the DOD Inspector General staff and representatives of the Defense Procurement Fraud Unit meet every 6 weeks to discuss the status of disclosures. During our review, we were told that these meetings were to resolve cases that had been open for an extended period, not to address whether disclosures should be accepted into the program. Through September 1994, DOD reported recoveries from the program of about $290 million, of which about 38 percent is associated with cases that are still open. The $290 million represents about 17 percent of the Justice Department's $1.7 billion in reported settlements on DOD procurement fraud cases between fiscal years 1987 and 1994. While the value of the voluntary disclosure program may well extend beyond the amount of dollar recoveries, we note that most disclosures did not result in significant dollar recoveries for the government. Of 129 closed cases, 81 cases, or about 63 percent, had reported recoveries of less than $100,000, of which 52 cases, or 40 percent, had no dollar recoveries. Forty-eight cases had reported recoveries of $100,000 or more, of which 15 cases had reported recoveries of $2 million or more. Figure 2 shows the distribution of DOD-reported dollar recoveries for closed cases. The $290 million attributable to the program is overstated because it includes an amount that should not be considered a recovery from the program, as well as amounts related to disclosures made prior to the formal initiation of the program. The reported recoveries include (1) $75 million representing a contractor's premature billings of progress payments and (2) recoveries from voluntary disclosure cases that predated the beginning of the program by up to 2 years. One case was closed before the program began. With regard to the progress payments, both the contractor's disclosure report and the government's subsequent investigative report showed the contractor prematurely billed the government by about $75 million. The Justice Department commented that the contractor then withheld approximately $75 million in billings at the time of the voluntary disclosure to rectify the premature billings. However, since DOD subsequently paid the contractor in full the amounts due under the contract, we believe the $75 million should not be claimed as a program recovery. DOD considers the submission of a claim for unearned progress payment to be a false claim and thus appropriate for reporting under the program. The Justice Department commented that there was no "recovery" of $75 million and that the government was damaged by the interest lost on the premature payments, the amount of which was included in the final settlement with the contractor. In our view, a recovery properly attributable to the voluntary disclosure program would be the interest cost on the $75 million premature payment. For 14 cases that predated the program, the DOD official responsible for the program told us that in 8 cases, although the disclosures predated the program announcement letter to industry, agreements were signed after the announcement and recoveries were resolved under the program. He said recoveries were made in three other cases after the program began. The DOD official believes, therefore, that these 11 cases were appropriately included in the program. However, he agreed that recoveries related to the three remaining cases should not be attributed to the program and indicated that DOD would reduce its reported recoveries--about $900,000--for these three cases. For closed cases, DOD records show that it took an average of 2.8 years to complete a voluntary disclosure case, with about 25 percent taking over 4 years. DOD records also show that the contractors' investigation took about 21 percent of the time and that the federal audit/investigation took about 52 percent of the time. Figure 3 shows the time to complete the closed cases. More than half the disclosures made since the program began are still reported as open. As of September 30, 1994, there were 173 open cases that have been open an average of 3.5 years. Twenty-nine of 44 cases disclosed in fiscal year 1990 and 13 cases disclosed in fiscal year 1987, the first full year of the program, were still reported as open. Further, the open case load is growing. The number of open cases at the end of fiscal year 1994 was greater than it was at the end of fiscal year 1990, despite a decline in the number of disclosures over the past 4 fiscal years. A Justice Department official suggested that some open cases may have been completed but not shown as closed in DOD's records. Between October 1994 and the end of June 1995, only 2 cases were closed while 15 were accepted into the program. A Justice Department official responsible for the program commented that not all contractors fully cooperate with the government and that this is one factor that makes investigations a time-consuming process and delays settlements. The official stated that few companies provide the government all its witness interview memoranda and that fewer still agree to provide the government a "road map" of the cases, believing that they are not obliged to serve as the government's investigator. According to this official, companies making voluntary disclosures tend to provide more assistance in a government investigation when the potential business and legal risks to the contractor are greater or when they want to give the impression that the company is turning over "a new leaf." Our review identified two instances of less than full contractor cooperation. In one case, the company official destroyed records related to its disclosure. According to DOD, this company was successfully criminally prosecuted and fined, the official was sentenced to jail, and the company was debarred. The government's investigation took 13 months, according to DOD information. In the other case, the contractor denied documents to government investigators, and the DOD Inspector General ultimately issued a subpoena to obtain the information. The government's investigation took about 5 years, according to DOD information. The Justice Department said that the investigation included not only the disclosure but an additional series of allegations made in the related qui tam case, which was filed almost simultaneously with the company's report. DOD officials considered removing this contractor from the program due to lack of cooperation but did not. The DOD official responsible for the program, however, stated that while there have been instances of less than total, or in a few cases very little, cooperation, they have been the exception rather than the rule. He added that disclosing a wrongdoing, conducting an internal investigation, and providing an internal investigative report without resorting to subpoenas or grand juries, were far more cooperative than would be present in any adversarial investigation. To ensure that each case is processed adequately and expeditiously, DOD guidelines require the investigative agencies to prepare a case progress report every 90 days summarizing the ongoing investigation and discussing case management issues, such as the status of the investigation and the level of contractor cooperation, and to forward the report to the DOD program manager. DOD also requires the investigative agencies to schedule a meeting with other appropriate program officials, such as those from the Justice Department and other DOD criminal investigative agencies, within 14 days of the progress report. The purpose of the meeting is to review the status of the case and determine what more needs to be done on each open investigation. According to the DOD program manager, investigative agencies are not systematically sending in the progress reports, and, in some cases, the reports that are submitted do not meet the program's reporting requirements. Further, he told us that the meetings are not taking place because staffing is limited and priority is given to new cases over open cases. He also said DOD had not been following up to ensure that the DOD requirements were met and cases were handled expeditiously. According to DOD data, the most frequent violation types disclosed were for contract mischarging and product substitution. Contract mischarging is applying material or labor charges to the wrong contract; product substitution is delivering products other than those specified in the contract. Other disclosures dealt with violations relating to overpricing of contracts negotiated under the Truth in Negotiations Act, false claims or statements, and excessive progress payment. Table 1 shows the number and types of violations disclosed for the closed cases. In 1986, the False Claims Act was amended to increase the qui tam relator's share of recovery in fraud settlements. Since that time, DOD procurement-related qui tam actions have steadily increased, while voluntary disclosures have decreased. Figure 4 shows the number of DOD-related qui tam actions filed and the number of DOD voluntary disclosures made since 1987. While the increase in qui tam actions may be related to the increase in a relator's share of the recovery, we found no data to explain the decrease in disclosures. There is little overlap between voluntary disclosures and related qui tam actions. For the 129 voluntary disclosure cases closed since the program began, only 4 involved qui tam actions. In one case we examined, the government benefited because the qui tam action (1) provided a road map essential to the government's case, (2) identified additional fraudulent activity, and (3) increased the amount of money recovered by the government. According to a DOD official, some contractors claim that the threat of a qui tam action might discourage voluntary disclosures because the company's investigation creates potential qui tam relators as more employees become aware of the potential fraud. He added that a contractor runs the risk of an employee filing a qui tam action before it can complete its investigation or even adequately define the issue to make a sufficiently complete voluntary disclosure for acceptance into the program. On the other hand, this DOD official remarked that other contractors indicated they would make disclosures in spite of possible qui tam actions. Other reasons cited for a contractor not making a voluntary disclosure include (1) contractor management conflicts between disclosing potential fraud to the government and the contractor's perceived duty to protect stockholder value; (2) contractor uncertainty of prosecution outcome from disclosing potential fraud; (3) the high cost of internal investigations, which is usually stipulated to be an unallowable cost for government reimbursement purposes; and (4) differences between contractor disclosure policies and its practices. According to an official in the DOD Inspector General's office, voluntary disclosures and qui tam actions complement each other and qui tams act as a "check and balance" to the program and contractor honesty. In commenting on a draft of this report, DOD emphasized that the program generates positive results and is clearly in the government's best interest. DOD's comments are presented in their entirety in appendix I, along with our evaluation of them. The Justice Department said that it is committed to the program and that the program has been remarkably effective in nurturing business honesty and integrity and in bringing good new cases to the government's attention. It believes the program to be a model for government voluntary disclosure programs. The Justice Department's comments are presented in their entirety in appendix II, along with our evaluation of them. We reviewed overall statistical information on the program's accomplishments, as well as information on qui tam actions and their relationship to voluntary disclosures. We also reviewed limited information on one of four qui tam cases. In addition, we talked to experts inside and outside of the government on the program's merits and on its relationship to qui tam actions. We performed limited tests of the data reviewed and found some inaccuracies. Thus, while we have concerns about the reliability of the data, it represents the only source of comprehensive information on the program's accomplishments other than individual case files. DOD and Justice Department policies and practices prevented our access to open voluntary disclosure case files. Our access to closed case file information was also limited when, according to Justice Department officials, it contained information covered by rule 6(e) of the Federal Rules of Criminal Procedure, which governs secrecy requirements of grand jury proceedings. As a result, the Justice Department would not provide us with the bulk of several closed case files we initially selected for review. Furthermore, according to the Justice Department, some of the documents in two of three closed cases we selected for initial review were unavailable because of a court-imposed protective order in one case and a confidentiality agreement between the U.S. Attorney's Office and the company in the other case. We conducted our review from May 1994 to July 1995 in accordance with generally accepted government accounting and auditing standards. Unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies to the Secretary of Defense; the Attorney General, Department of Justice; the Director, Office of Management and Budget; and other interested congressional committees. Copies will also be made available to others upon request. Please contact me at (202) 512-4587 if you or your staff have any questions concerning this report. The major contributors to this report are listed in appendix III. The following are GAO's comments on the Department of Defense's (DOD) letter dated October 13, 1995. "The number of current investigative cases and resulting recoveries of money to the Government and convictions of defense contractors being conducted by the Defense Criminal Investigative Service shows that fraud is still increasing. The Federal Bureau of Investigations statistics shown for the United States substantiate the same trend. Losses due to fraud are approximately $200 billion a year." Although our report notes that the program represented about 17 percent of the Justice Department's $1.7 billion in reported settlements on DOD procurement fraud cases between fiscal years 1987 and 1994, actual program recoveries were a matter of disagreement. 3. We modified the report's text to incorporate DOD's comments. 4. We continue to disagree with DOD on reporting the $75 million in premature progress payments as a recovery of the program since the amount was ultimately paid to the contractor. 5. We modified the report's text to incorporate DOD's comments. 6. We modified the report's text to incorporate DOD's comments. 7. We modified the report's text to incorporate DOD's comments. The following are GAO's comments on the Department of Justice's letter dated October 11, 1995. 1. We do not make the conclusion that the Voluntary Disclosure Program is not a useful or effective means of identifying or combatting fraud. 2. We agree that statistics alone do not tell the whole picture of the potential contribution of the program. We recognize that the program's value may extend beyond that which can be measured by available statistics and that corporate compliance that comes out of voluntary disclosures can have long-term effects on business honesty and integrity. 3. DOD continues to report two open cases in which the Justice Department did not concur because it believed the contractor was motivated by recognition of imminent detection. 4. While we attempted to work with the Justice Department in obtaining information from closed case files, the length of time it took to obtain information did not allow us to complete our audit in a timely manner. Further, without knowledge of the information withdrawn from the files, we could not effectively evaluate the administration of the program. 5. We have deleted this sentence based on the Justice Department's comments. 6. For purposes of background and brevity, we summarized the criteria for program acceptance. A full presentation of the criteria does not, in our view, add to the background presentation. 7. We have modified the report based on the Justice Department's comments. 8. We have modified the report based on the Justice Department's comments. 9. We have modified the report based on the Justice Department's comments. 10. Although the government was damaged by the amount of lost interest on the premature payment to the contractor, the $75 million represents the amount of the progress payment and does not include interest lost. 11. We have modified the report based on the Justice Department's comments. 12. We have modified the report based on the Justice Department's comments. 13. We have modified the report based on the Justice Department's comments. 14. We have modified the report based on the Justice Department's comments. John E. Clary Joe D. Quicksall Ronald J. Salo 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 provided information on the Department of Defense's (DOD) Voluntary Disclosure Program, focusing on the: (1) extent to which defense contractors participate in the program; (2) amount of money that has been recovered under the program; (3) time taken to close disclosure cases; (4) most common type of disclosures; and (5) extent of overlap between voluntary disclosures and qui tam actions. GAO found that: (1) although 48 of the top 100 defense contractors have made voluntary disclosures, the total number of disclosures under the program has been relatively small and dollar recoveries have been modest; (2) from its inception in 1986 through September 1994, DOD reported that, of the thousands of defense contractors, 138 contractors made 325 voluntary disclosures of potential procurement fraud; (3) DOD reported recoveries from these disclosures to be $290 million, about 17 percent of total reported DOD procurement fraud recoveries between fiscal years (FY) 1987 and 1994; (4) GAO's review indicated that DOD's reported recoveries of $290 million were overstated because they included $75 million in premature progress payments and amounts from disclosures made prior to the program; (5) further, DOD accepted some disclosures into the program that the Justice Department believed were triggered by imminent government discovery and thus did not meet the criteria for admission; (6) voluntary disclosure cases took an average of 2.8 years to close, with about 25 percent taking over 4 years; (7) open cases are taking longer; (8) as of September 1994, DOD data showed that open cases averaged 3.5 years, with over half of the cases disclosed in FY 1990 still open; (9) less than full contractor cooperation with the government and low priority given by DOD and other investigative agencies to managing cases expeditiously may be problems in some cases; (10) most disclosures did not result in significant dollar recoveries for the government; (11) of 129 closed cases, 81 cases, or about 63 percent, had reported recoveries of less than $100,000, of which 52 cases, or 40 percent, had no dollar recoveries; (12) forty-eight cases had reported recoveries of $100,000 or more, of which 15 cases had reported recoveries of $2 million or more; (13) there is little overlap between voluntary disclosures and qui tam actions; and (14) of the 129 voluntary disclosure cases closed since the program began, 4 involved qui tam actions.
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Information security is a critical consideration for any organization that depends on information systems and computer networks to carry out its mission or business. It is especially important for government agencies, where the public's trust is essential. The dramatic expansion in computer interconnectivity and the rapid increase in the use of the Internet are changing the way our government, the nation, and much of the world communicate and conduct business. Without proper safeguards, systems are unprotected from individuals and groups with malicious intent to intrude and use the access to obtain sensitive information, commit fraud, disrupt operations, or launch attacks against other computer systems and networks. These concerns are well founded for a number of reasons, including the dramatic increase in reports of security incidents, the ease of obtaining and using hacking tools, the steady advance in the sophistication and effectiveness of attack technology, and the dire warnings of new and more destructive attacks to come. Computer-supported federal operations are likewise at risk. Our previous reports, and those of agency inspectors general, describe persistent information security weaknesses that place a variety of federal operations at risk of disruption, fraud, and inappropriate disclosure. We have designated information security as a governmentwide high-risk area since 1997--a designation that remains today. Recognizing the importance of securing federal information systems, in December 2002, Congress enacted the Federal Information Security Management Act (FISMA) to strengthen the security of information and systems within federal agencies. FISMA requires each agency to develop, document, and implement an agencywide information security program to provide information security for the information and systems that support the operations and assets of the agency, using a risk-based approach to information security management. Following the stock market crash of 1929, Congress passed the Securities Exchange Act of 1934, which established SEC to enforce securities laws, to regulate the securities markets, and to protect investors. In enforcing these laws, SEC issues rules and regulations to provide protection for investors and to help ensure that the securities markets are fair and honest. This is accomplished primarily by promoting adequate and effective disclosure of information to the investing public. The commission also oversees and requires the registration of other key participants in the securities industry, including stock exchanges, broker-dealers, clearing agencies, depositories, transfer agents, investment companies, and public utility holding companies. SEC is an independent, quasi-judicial agency that operates under a bipartisan commission appointed by the President and confirmed by the Senate. SEC had a budget of about $888 million and staff of 3,865 to monitor and regulate the securities industry in fiscal year 2005. In 2003, the volume traded on U.S. exchanges and NASDAQ exceeded $22 trillion and 850 billion shares. Each year the commission accepts, processes, and disseminates to the public more than 600,000 documents from companies and individuals, including annual reports from more than 12,000 reporting companies. In fiscal year 2005, SEC collected $595 million for filing fees and $1.6 billion in penalties and disgorgements. In addition, the commission uses other systems that maintain sensitive personnel information for its employees, filing data for corporations, and legal information on enforcement activities. SEC relies extensively on computerized systems to support its financial operations and store the sensitive information it collects. Its local and wide area networks interconnect these systems. To support the commission's financial management functions, it relies on several financial systems to process and track financial transactions such as filing fees paid by corporations and penalties from enforcement activities. According to FISMA, the Chairman of SEC has responsibility for, among other things, (1) providing information security protections commensurate with the risk and magnitude of the harm resulting from unauthorized access, use, disclosure, disruption, modification, or destruction of the agency's information systems and information; (2) ensuring that senior agency officials provide information security for the information and information systems that support the operations and assets under their control; and (3) delegating to the agency CIO the authority to ensure compliance with the requirements imposed on the agency under FISMA. SEC's CIO is responsible for developing and maintaining a departmentwide information security program and for developing and maintaining information security policies, procedures, and control techniques that address all applicable requirements. The objectives of our review were to assess (1) the status of SEC's actions to correct or mitigate previously reported information security and (2) the effectiveness of the commission's information system controls for ensuring the confidentiality, integrity, and availability of its information systems and information. Our evaluation was based on our Federal Information System Controls Audit Manual, which contains guidance for reviewing information system controls that affect the confidentiality, integrity, and availability of computerized data. Specifically, we evaluated information security controls that are intended to prevent, limit, and detect electronic access to computer resources (data, programs, and systems), thereby protecting these resources against unauthorized disclosure, modification, and use; provide physical protection of computer facilities and resources from espionage, sabotage, damage, and theft; prevent the exploitation of vulnerabilities; prevent the introduction of unauthorized changes to application or system software; and ensure that work responsibilities for computer functions are segregated so that one individual does not perform or control all key aspects of computer-related operations and, thereby, have the ability to conduct unauthorized actions or gain unauthorized access to assets or records without detection. In addition, we evaluated SEC's information security program. Such a program includes assessing risk; developing and implementing policies, procedures, and security plans; providing security awareness and training; testing and evaluating the effectiveness of controls; planning, implementing, evaluating, and documenting remedial actions to address information security deficiencies; detecting, reporting, and responding to security incidents; and ensuring continuity of operations. To evaluate SEC's information security controls and program, we identified and examined pertinent SEC security policies, procedures, guidance, security plans, and relevant reports. In addition, we conducted tests and observations of controls in operation and reviewed corrective actions taken by the commission to address vulnerabilities identified during our previous review. We also discussed whether information system controls were in place, adequately designed, and operating effectively with key security representatives, system administrators, and management officials. Although SEC has taken steps to address its information security controls weaknesses, most of the weaknesses persist. Specifically, the commission has corrected or mitigated 8 of the 51 weaknesses that we previously reported as unresolved. For example, SEC has replaced a vulnerable, publicly accessible workstation with a terminal that provides the minimum capabilities needed to accomplish its purpose and a more secure configuration; developed and implemented procedures to ensure that changes made to a major financial system are reviewed, tested, and approved prior to implementation; and hired contractors to appropriately segregate change management and security management functions for a major financial system. While SEC has made some progress in strengthening its information security controls, it has not completed actions to correct or mitigate the remaining 43 of the 51 previously reported weaknesses. These weaknesses include allowing remote access to production servers via unauthorized accounts; permitting inadequate and insecure password storage and configuration; allowing excessive access rights to Windows servers, network system accounts, and sensitive information; and failing to adequately secure access to sensitive computing environments. Failure to resolve these issues will leave SEC's sensitive data and facilities vulnerable to unauthorized access, manipulation, and destruction. SEC has not effectively implemented information security controls to properly protect the confidentiality, integrity, and availability of its financial and sensitive information and information systems. In addition to the 43 previously reported weaknesses that remain uncorrected, we identified 15 new information security weaknesses during this review. Most of the 58 identified weaknesses pertained to electronic access controls, as illustrated in figure 1. A primary reason for these weaknesses is that SEC has not yet fully implemented its information security program. As a result, weaknesses in controls over its financial and sensitive data increase the risk of unauthorized disclosure, modification, or destruction of data. Protecting the resources that support critical operations from unauthorized access is a basic management objective for any organization. Organizations accomplish this objective by designing and implementing electronic controls that are intended to prevent, limit, and detect unauthorized access to computing resources, programs, and information. Electronic access controls include user accounts and passwords, access rights and permissions, network services and devices, and audit and monitoring of security-related events. Inadequate electronic access controls diminish the reliability of computerized information, and they increase the risk of unauthorized disclosure, modification, and destruction of sensitive information and of disruption of service. A computer system must be able to identify and differentiate users so that activities on the system can be linked to specific individuals. When an organization assigns unique user accounts to specific users, the system distinguishes one user from another--a process called identification. The system must also establish the validity of a user's claimed identity through some means of authentication, such as a password, that is known only to its owner. The combination of identification and authentication, such as user account/password combinations, provides the basis for establishing individual accountability and for controlling access to the system. Accordingly, agencies (1) implement procedures to control the creation, use, and removal of user accounts and (2) establish password parameters, such as length, life, and composition, to strengthen the effectiveness of account/password combinations for authenticating the identity of users. SEC has not adequately controlled user accounts and passwords to ensure that only authorized individuals are granted access to its systems and data. For example, SEC has not finalized policies and procedures to enforce strong password management or ensure the most appropriate and secure password settings are used. Similarly, it did not complete efforts to develop and implement a policy and process to prevent unauthorized remote access to security accounts. As a result, there is increased risk that unauthorized users could gain authorized user identification and password combinations to claim a user identity and then use that identity to gain access to SEC systems. A basic underlying principle for security computer systems and data is the concept of least privilege, which means that users are granted only those access rights and permissions they need to perform their official duties. User rights are allowable actions that can be assigned to users or groups. File and directory permissions are rules associated with a particular file or directory; they regulate which users can access the file or directory and in what manner. Organizations establish access rights and permissions to restrict legitimate users' access to only those programs and files that they need to do their work. Assignment of rights and permissions must be carefully considered to avoid giving users unnecessary access to sensitive files and directories. SEC routinely permitted excessive access to the computer systems that support its critical financial and regulatory information. For example, SEC permitted users to modify sensitive information or critical system files and directories, although the users did not need such permissions to perform their job-related duties. Further, the commission did not implement a methodology to ensure that user rights were assigned on the basis of job function on all its servers. As a result, there is increased risk that SEC's financial and sensitive data and applications may be compromised. Networks are collections of interconnected computer systems and devices that allow individuals to share resources such as computer programs and information. Because sensitive programs and information are stored on or transmitted along networks, effectively securing networks is essential to protecting computing resources and data from unauthorized access, manipulation, and use. Organizations secure their networks, in part, by installing and configuring network devices that permit authorized network service requests, deny unauthorized requests, and limit the services that are available on the network. Devices used to secure networks include (1) firewalls that prevent unauthorized access to the network, (2) routers that filter and forward data along the network, (3) switches that forward information among segments of a network, and (4) servers that host applications and data. Network services consist of protocols for transmitting data between network devices. Insecurely configured network services and devices can make a system vulnerable to internal or external threats, such as denial-of-service attacks. Because networks often include both external and internal access points for electronic information assets, failure to secure these assets increases the risk of unauthorized modification of sensitive information and systems, or of disruption of service. SEC did not securely control network services to prevent unauthorized access to, and ensure the integrity of, SEC's computer networks, systems, and sensitive information. For example, SEC's network infrastructure was not securely configured, access to sensitive files on its network devices was not adequately controlled, and SEC workstations were not adequately configured. Further, SEC did not establish procedures for securing external connections to its network or provide guidance for implementing secure wireless networks. The commission's network security weaknesses could result in unauthorized and inappropriate access to SEC systems and sensitive information. To establish individual accountability, monitor compliance with security policies, and investigate security violations, it is crucial to determine what, when, and by whom specific actions are taken on a system. Organizations accomplish this by implementing system or security software that provides an audit trail that they can use to determine the source of a transaction or attempted transaction and to monitor users' activities. The way in which organizations configure system or security software determines the nature and extent of information that can be provided by the audit trail. To be effective, organizations should configure their software to collect and maintain audit trails that are sufficient to track security events. SEC did not adequately audit and monitor security events. For example, SEC has not enabled audit trails for two of its financial applications; it has not deployed an effective intrusion detection system; and it does not have a process to analyze security incidents. In addition, at least two of the servers under our review lacked virus protection software. As a result, if a system were modified or disrupted, the commission's capability to trace or recreate events would be diminished. In addition to electronic access controls, other important controls should be in place to ensure the security and reliability of an organization's data. These controls include policies, procedures, and control techniques to physically secure computer resources, prevent exploitation of vulnerabilities, appropriately segregate incompatible duties, and prevent unauthorized changes to application software. Weaknesses in these areas increase the risk of unauthorized use, disclosure, modification, or loss of SEC's financial systems and sensitive information. Physical security controls are important for protecting computer facilities and resources from espionage, sabotage, damage, and theft. These controls restrict physical access to computer resources, usually by limiting access to the buildings and rooms in which the resources are housed and by periodically reviewing the access granted in order to ensure that access continues to be appropriate. At SEC, physical access control measures (such as guards, badges, and locks--used alone or in combination) are vital to protecting the agency's sensitive computing resources from both external and internal threats. SEC has taken steps to improve its physical security, such as relocating its headquarters operations to a newly constructed building that employs various technologies to control physical access. Further, SEC has recognized the need for physical security enhancements and has included a gated entry and an updated card access system in its future plans. However, SEC did not always effectively protect and control physical access to sensitive work areas in its facilities. For example, we found that many personnel at an SEC facility had unneeded access to the on-site computer room. Further, SEC did not always lock wiring closets and permitted individuals unnecessary access to the data center. Until SEC fully addresses its physical security vulnerabilities, there is increased risk that unauthorized individuals could gain access to sensitive computing resources and data and inadvertently or deliberately misuse or destroy them. Patch management is a critical process that can help to alleviate many of the challenges of securing computing systems. As vulnerabilities in a system are discovered, attackers may attempt to exploit them, possibly causing significant damage. Malicious acts can range from defacing Web sites to taking control of entire systems and thereby being able to read, modify, or delete sensitive information; disrupt operations; or launch attacks against other organizations' systems. When a software vulnerability is discovered, the software vendor may develop and make a patch or work- around to mitigate the vulnerability. SEC does not have an effective patch management program. For example, SEC has not installed patches for critical vulnerabilities on two audit log servers and a network device. Because SEC has not installed and maintained the latest patches, its computing systems are more vulnerable to attackers taking advantage of outdated, less secure software. Segregation of duties refers to the policies, procedures, and organizational structure that help ensure that no single individual can independently control all key aspects of a process or computer-related operation and thereby gain unauthorized access to assets or records. Often segregation of duties is achieved by dividing responsibilities among two or more individuals or organizational groups. This division of responsibilities diminishes the likelihood that errors and wrongful acts will go undetected, because the activities of one individual or group will serve as a check on the activities of the other. Inadequate segregation of duties increases the risk that erroneous or fraudulent transactions could be processed, improper program changes could be implemented, and computer resources could be damaged or destroyed. Although SEC has taken action to enhance the segregation of incompatible security and change management functions for one of its financial applications, we identified instances in which duties were not adequately segregated to ensure that no individual had complete authority or system access. For example, SEC did not adequately segregate incompatible security and administrative functions within one of its financial applications. Specifically, financial management staff have been assigned roles that allow them to perform both security and systems administration duties for the application. Without adequate segregation of duties or appropriate mitigating controls, SEC is at increased risk that fraudulent activities could occur without detection. It is important to ensure that only authorized and fully tested application programs are placed in operation. To ensure that changes to application programs are necessary, work as intended, and do not result in the loss of data or program integrity, such changes should be documented, authorized, tested, and independently reviewed. In addition, test procedures should be established to ensure that only authorized changes are made to the application's program code. SEC did not establish and implement effective application change controls. For example, SEC did not finalize procedures to ensure that only authorized changes were made to the production version of application code for all applications. Further, SEC did not appropriately document the authorizations for software modifications, conduct independent reviews of software changes, or adequately control its software libraries. As a result, the risk of unauthorized, untested, or inaccurate application modifications is increased. SEC has made limited progress in developing and implementing the elements of FISMA's mandated information security program. In response to our prior recommendations, the commission has established a central security management group; appointed a senior information security officer to manage the program; increased the number of security personnel; certified and accredited several major applications; and established a backup data center for service continuity. However, other key elements of an information security program have not been fully or consistently developed, documented, or implemented for SEC's information systems. A key reason for SEC's information security controls weaknesses is that the commission has not fully developed or implemented an information security program to ensure that effective controls are established and maintained. Without a strong information security program, SEC cannot protect its information and its information systems. FISMA requires agencies to develop, document, and implement an information security program that includes the following: periodic assessments of the risk and the magnitude of harm that could result from the unauthorized access, use, disclosure, disruption, modification, or destruction of information and information systems; policies and procedures that (1) are based on risk assessments, (2) cost- effectively reduce risks, (3) ensure that information security is addressed throughout the life cycle of each system, and (4) ensure compliance with applicable requirements; security awareness training to inform personnel--including contractors and other users of information systems--of information security risks and their responsibilities in complying with agency policies and procedures; at least annual testing and evaluation of the effectiveness of information security policies, procedures, and practices relating to management, operational, and technical controls of every major information system that is identified in the agencies' inventories; a process for planning, implementing, evaluating, and documenting remedial action to address any deficiencies in their information security policies, procedures, or practices; procedures for detecting, reporting, and responding to security plans and procedures to ensure continuity of operations for information systems that support the operations and assets of the agency. Identifying and assessing information security risks are essential steps in determining what controls are required. Moreover, by increasing awareness of the risks, these assessments can generate support for the policies and controls that are adopted in order to help ensure that these policies and controls operate as intended. Further, Office of Management and Budget (OMB) Circular A-130, appendix III, prescribes that risk be reassessed when significant changes are made to computerized systems--or at least every 3 years. Although SEC had risk assessments for the systems we reviewed, it did not follow a documented process for risk assessments. Specifically, SEC did not have policies and procedures on how to perform risk assessments. Until the commission's risk assessment process is completed and institutionalized, risks may not be adequately assessed and countermeasures may not be properly identified. As a result, inadequate or inappropriate security controls may be implemented that do not address the system's true risk and efforts to implement effective controls later on may be more costly. Another key task in developing, documenting, and implementing an effective information security program is to establish and implement risk- based policies, procedures, and technical standards that cover security over an agency's computing environment. If properly implemented, policies and procedures can help to reduce the risk that could come from unauthorized access or disruption of services. Because security policies are the primary mechanism by which management communicates its views and requirements, it is important to establish and implement them. SEC had no finalized policies governing its information security program. Since the completion of our review, SEC has finalized SEC Regulation 24- 04, the first level of its policy framework that provides high-level policy, requirements, and governance for security over its information systems. However, policies and procedures for password management, remote access to security accounts, external connections to networks, application change controls, and patch management remain in draft. As a result, SEC has less assurance that its systems and information are sufficiently protected. Another FISMA requirement for an information security program is that it promote awareness and provide required training for users so that they can understand the system security risks and their role in implementing related policies and controls to mitigate those risks. Computer intrusions and security breakdowns often occur because computer users fail to take appropriate security measures. For this reason, it is vital that employees and contractors who use computer resources in their day-to-day operations be made aware of the importance and sensitivity of the information they handle, as well as the business and legal reasons for maintaining its confidentiality, integrity, and availability. FISMA mandates that all federal employees and contractors who use agency information systems be provided with periodic training in information security awareness and accepted information security practice. SEC policy requires that employees and contractors take annual security awareness training. SEC could not ensure that all system users complied with the annual security awareness training requirement. The training contractor who provided information security awareness training supplied SEC with training reports that contained reporting inaccuracies, making it difficult for SEC to determine if its users had complied with the training requirement. After the completion of our review, SEC contracted with a new vendor for security awareness training and is striving to meet its goal of 100 percent compliance for all employees, contractors, and agency detailees. Until SEC can ensure that each employee, contractor, and agency detailee receives annual security awareness training, security lapses due to user activity are more likely to occur. Testing and evaluating systems is a key element of an information security program that ensures that an agency is in compliance with policies and that policies and controls are both appropriate and effective. This type of oversight is a fundamental element because it demonstrates management's commitment to the security program, reminds employees of their roles and responsibilities, and identifies and mitigates areas of noncompliance and ineffectiveness. Although control tests and evaluations may encourage compliance with security policies, the full benefits are not achieved unless the results improve the security program. Analyzing the results of security reviews provides security specialists and business managers with a means of identifying new problem areas, reassessing the appropriateness of existing controls, and identifying the need for new controls. FISMA requires that the frequency of tests and evaluations be based on risks, but occur no less than annually. SEC lacks a program to test and evaluate the effectiveness of information system controls. SEC conducts security tests and evaluations as part of its certification and accreditation process, which is required every 3 years or when significant changes occur to the system. However, SEC had not completed testing of its security controls in its general support system. SEC's Inspector General noted in its latest FISMA report that the general support system is a critical security component for all of SEC's major applications. The effectiveness of the general support system controls is a significant factor in the effectiveness of security controls for its major applications. Since the commission has not tested the security controls in the general support system, it cannot be assured that tests and evaluations are sufficient to assess whether its security policies and controls are appropriate and working as intended. Remedial action plans are a key component described in FISMA. They assist agencies in identifying, assessing, prioritizing, and monitoring the progress in correcting security weaknesses that are found in information systems. According to OMB Circular A-123, agencies should take timely and effective action to correct deficiencies that they have identified through a variety of information sources. To accomplish this, remedial action plans should be developed for each deficiency and progress should be tracked for each. SEC has not developed a reporting and tracking mechanism for its remedial action plans. Further, our review of remedial action plans for five of the applications certified and accredited during fiscal year 2005 noted that some of the control deficiencies had been labeled "waiver granted" and therefore had been exempted from remedial actions. The waivers had been granted based on future plans to replace the application or other cost- based reasons. However, the remedial plans lacked complete justifications, risk mitigation, and cost-benefit analysis for the deficiencies that had been waived. Nevertheless, these applications had been certified and accredited and granted full authority to operate. As a result, SEC did not have assurance that all known information security weaknesses had been mitigated or corrected. Even strong controls may not block all intrusions and misuse, but organizations can reduce the risks associated with such events if they promptly take steps to detect and respond to them before significant damage is done. In addition, accounting for and analyzing security problems and incidents are effective ways for organizations to gain a better understanding of the threats to their information and the costs of their security-related problems. Such analyses can pinpoint vulnerabilities that need to be eliminated so that they will not be exploited again. Problem and incident reports can provide valuable input for risk assessments, can help in prioritizing security improvement efforts, and can be used to illustrate risks and related trends for senior management. SEC does not have a program to handle security incidents. The commission has drafted an incident response program plan that provides general guidance on handling security incidents; however, it lacks a comprehensive program to collect, document, and analyze incident information to determine if trends exist that could be mitigated through user awareness, training, or the addition of technical security controls. As previously reported, SEC has acknowledged the importance of security incident reporting and analysis, however, it does not perform trend analysis of its security incidents. Until SEC formalizes its process for handling security incidents, it remains at risk of not being able to detect or respond quickly to them. Continuity of operations controls should be designed to ensure that, when unexpected events occur, key operations continue without interruption or are promptly resumed, and critical and sensitive data are protected. These controls include environmental controls and procedures designed to protect information resources and minimize the risk of unplanned interruptions, along with a well-tested plan to recover critical operations should interruptions occur. If service continuity controls are inadequate, even relatively minor interruptions can result in lost or incorrectly processed data, which can cause financial losses, expensive recovery efforts, and inaccurate or incomplete financial or management information. SEC accomplished some elements of disaster recovery planning, but it did not complete all the tasks necessary to establish and maintain an effective continuity of operations program. To its credit, SEC set up a backup data center in a separate contractor facility to replicate its operations center functionality and has drafted contingency plans for many of its major applications, so that recovery steps are documented in the event of a disaster. SEC also conducted a partially successful test to validate the sufficiency of the plans and assess SEC's ability to recover operations. However, SEC successfully tested the recovery of only 12 of 20 of its major applications. Despite SEC's accomplishments in the disaster recovery area, SEC must test its service continuity plans to ensure its ability to continue and/or recover operations in the event of a disaster. Information security weaknesses--both old and new--continue to impair SEC's ability to ensure the confidentiality, integrity, and availability of financial and other sensitive data. While the commission has made some progress in addressing our previous recommendations, the many outstanding weaknesses place its systems at risk. Until SEC fully develops, documents, and implements a comprehensive agencywide information security program that includes enhanced policies, procedures, plans, training, and continuity of operations, its facilities and computing resources and the information that is processed, stored, and transmitted on its systems will remain vulnerable to unauthorized access, modification, or destruction. To help establish effective information security over key financial systems, data, and networks, we recommend that the SEC Chairman direct the Chief Information Officer to take the following seven actions to fully develop, document, and implement an effective agencywide information security program: Fully document and implement a process for assessing risks for its information systems. Finalize comprehensive information security policies and procedures. Ensure that all system users comply with annual security awareness training requirements. Institute a testing and evaluation program that includes testing the controls within the general support system. Develop a mechanism to track remedial action plans that incorporates all identified weaknesses and related risks. Establish a program for handling security incidents with detection, response, analysis, and reporting capabilities. Maintain a continuity of operations program that includes fully tested plans for restoring operations. We are also making additional recommendations in a separate report designated for "Limited Official Use Only." These recommendations address actions needed to correct specific information security weaknesses related to electronic access controls and other information system controls. In providing written comments on a draft of this report, the SEC Chairman agreed with our recommendations. Specifically, he stated that our recommended actions are appropriate and actionable and that SEC's current efforts are focused on fully implementing them. The Chairman's comments are reprinted in appendix I of this report. The Chairman's comments also addressed several achievements in advancing SEC's information security program, including certifying and accrediting 16 of 20 major applications, implementing a new automated system for tracking plans of action and milestones, and successfully testing continuity of operations planning efforts for 12 major applications. He also highlighted SEC's annual security awareness training compliance rate exceeding 90 percent and a new computer security incident response team in place to implement and test SEC's incident response program. The Chairman stated that he has identified information security as the commission's highest information technology priority and will continue to implement corrective actions. SEC plans to complete the corrective actions for specific weaknesses we identified, as well as implement recommended information security program enhancements to address the agency's program deficiencies. This report contains recommendations to you. As you know, 31 U.S.C. 720 requires that the head of a federal agency submit a written statement of the actions taken on our recommendations to the Senate Committee on Homeland Security and Governmental Affairs and to the House Committee on Government Reform not later than 60 days from the date of the report and to the House and Senate Committees on Appropriations with the agency's first request for appropriations made more than 60 days after the date of this report. Because agency personnel serve as the primary source of information on the status of recommendations, GAO requests that the agency also provide us with a copy of your agency's statement of action to serve as preliminary information on the status of open recommendations. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Committee on Banking, Housing, and Urban Affairs; the Subcommittee on Oversight of Government Management, the Federal Workforce and the District of Columbia, Senate Committee on Homeland Security and Governmental Affairs; House Committee on Financial Services; the Subcommittee on Government Management, Finance, and Accountability, House Committee on Government Reform; and SEC's Office of Managing Executive for Operations; Office of the Executive Director; Office of Financial Management; Office of Information Technology; and the SEC's Inspector General. We will also make copies available to others on request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions regarding this report, please contact me at (202) 512-6244 or by e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II. In addition to the individual named above, Suzanne Lightman, Assistant Director; Jason Carroll; Lon Chin; West Coile; Anh Dang; Kristi Dorsey; Nancy Glover; Kenneth Johnson; Stephanie Lee; Duc Ngo; Eugene Stevens; Charles Vrabel; and Chris Warweg made key contributions to this report.
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The Securities and Exchange Commission (SEC) has a demanding responsibility enforcing securities laws, regulating the securities markets, and protecting investors. In enforcing these laws, SEC issues rules and regulations to provide protection for investors and to help ensure that the securities markets are fair and honest. It relies extensively on computerized systems to support its financial and mission-related operations. Information security controls affect the integrity, confidentiality, and availability of sensitive information maintained by SEC. As part of the audit of SEC's fiscal year 2005 financial statements, GAO assessed (1) the status of SEC's actions to correct or mitigate previously reported information security weaknesses and (2) the effectiveness of the commission's information system controls in protecting the confidentiality, integrity, and availability of its financial and sensitive information. Although SEC has taken steps to strengthen its information security program, most of the previously reported information security controls and program weaknesses persist. Specifically, the commission has corrected or mitigated 8 of the 51 weaknesses that GAO reported as unresolved in last year's report. Among the corrective actions SEC has taken include replacing a vulnerable, publicly accessible workstation and developing and implementing change control procedures for a major application. However, the commission has not yet effectively controlled remote access to its servers, established controls over passwords, managed access to its systems and data, securely configured network devices and servers, or implemented auditing and monitoring mechanisms to detect and track security incidents. Overall, SEC has not effectively implemented information security controls to properly protect the confidentiality, integrity, and availability of its financial and sensitive information and information systems. In addition to the 43 previously reported weaknesses that remain uncorrected, GAO identified 15 new information security weaknesses. Most identified weaknesses pertained to electronic access controls such as user accounts and passwords, access rights and permissions, and network devices and services. These weaknesses increase the risk that financial and sensitive information will be inadequately protected against disclosure, modification, or loss, possibly without detection, and place SEC operations at risk of disruption. A key reason for SEC's information security controls weaknesses is that the commission has not fully developed, implemented, or documented key elements of an information security program to ensure that effective controls are established and maintained. Until SEC implements such a program, its facilities and computing resources and the information that is processed, stored, and transmitted on its systems will remain vulnerable.
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The Results Act requires annual performance plans to cover each program activity set out in the agencies' budgets. The act requires the plans to (1) establish performance goals to define the level of performance to be achieved by a program activity; (2) express such goals in an objective, quantifiable, and measurable form; (3) briefly describe the strategies and resources required to meet performance goals; (4) establish performance indicators to be used in measuring or assessing the relevant outputs, service levels, and outcomes of each program activity; (5) provide a basis for comparing actual results with the performance goals; and (6) describe the means to verify and validate information used to report on performance. DOT submitted to the Congress performance plans for fiscal years 1999 and 2000. DOT's performance plan provides a clear statement of the performance goals and measures that address program results. Program goals and measures are expressed in a quantifiable and measurable manner and define the levels of performance. However, the plan could be improved by consistently linking the performance goals and strategic outcomes and consistently describing interagency coordination for crosscutting programs and the Department's contribution to these programs. In addition, the plan could be improved by consistently describing how the management challenges facing the Department will be addressed, including how the Department will address certain financial management challenges identified by its OIG. DOT's plan includes performance goals and measures that address program results and the important dimensions of program performance. The goals and measures define the level of performance and activities for specific programs. For example, the performance goal for reducing recreational boating fatalities from 819 in fiscal year 1997 to 720 or fewer in fiscal year 2000 will be accomplished by the core activities of several U.S. Coast Guard programs--boating safety grants provided to the states, regulations developed by the Recreational Boating Safety program, and boat inspections conducted by the Coast Guard auxiliary. The plan's goals and measures are objective, quantifiable, and measurable. For all except a few performance goals, DOT's plan includes projected target levels of performance for fiscal year 2000; for several goals, the plan includes multiyear targets. For goals that have no targets, an appendix to the plan explains why a target was not included. For nearly all of the goals and measures, the plan includes graphs that show baseline and trend data as well as the targets for fiscal years 1999 and 2000. The graphs clearly indicate trends and provide a basis for comparing actual program results with the established performance goals. For example, the performance goal for hazardous materials incidents has a graph that shows the number of serious hazardous materials incidents in transportation from 1985 through 1997. The graph also includes target levels for fiscal years 1999 and 2000 so a reader can conclude that this goal is not new in the fiscal year 2000 plan. If only a fiscal year 2000 target is indicated on a graph, the reader can assume that this is a new goal; however, this point is not explicit. The plan could be improved by indicating new goals that do not have a counterpart in the previous version. In addition, the plan includes performance goals to resolve a few mission-critical management challenges identified by us and/or DOT's OIG.(See app. I.) For example, we reported that the Federal Aviation Administration (FAA) had encountered delays in implementing security initiatives at airports. The plan includes a performance goal to increase the detection rate of explosive devices and weapons that may be brought aboard aircraft, which will help measure progress in implementing the security initiatives. However, for the majority of the management challenges that have been identified, the plan does not include goals and measures. For example, the plan lists several activities to address problems with FAA's $41 billion air traffic control modernization program, which since 1995 we have identified as a high-risk information technology initiative. The plan could be improved by consistently including goals and specific measures for addressing the challenges. In addition, the plan could be improved by more fully explaining how the Department will address certain financial management challenges identified by the OIG. For example, the OIG reported that the Department's accounting system could not be used as the only source of financial information to prepare its financial statements. The fiscal year 2000 plan does not address this issue. Additionally, we question whether the plan includes the most current or complete milestones for solving long-standing financial management weaknesses. For example, the plan states that in fiscal year 1999, FAA's new cost accounting system will capture financial information by project and activity for all of FAA's projects. However, according to FAA's fiscal year 1998 audit report, the cost accounting system that was scheduled to be operational by October 1, 1998, will not be fully implemented until March 31, 2001. DOT's plan includes strategic outcomes for each of the Department's five strategic goals. For example, for the strategic goal of safety, the Department aims to achieve six strategic outcomes--such as reducing the number of transportation-related deaths, the number and severity of transportation-related injuries, and the number of reportable transportation incidents and their related economic costs. The plan then lists specific annual performance goals that the Department will use to gauge its progress. However, in a few cases, the strategic outcomes have no related annual performance goals. For example, a strategic outcome related to mobility--to provide preventative measures and expeditious responses to natural and man-made disasters in partnership with other agencies to ensure that the Department provides for the rapid recovery of the transportation system--cannot be logically linked to any annual performance goals. The plan could be improved by including at least one annual performance goal for each strategic outcome. For each performance goal, the plan typically mentions those federal agencies that have outcomes in common with the Department. The plan also indicates goals and measures that are being mutually undertaken to support crosscutting programs. For example, the plan states that both FAA and the National Aeronautics and Space Administration (NASA) have complementary performance goals to decrease by 80 percent the rate of aviation fatalities by the year 2007. However, the plan could be improved by describing the nature of the coordination and consistently discussing the Department's contribution to the crosscutting programs. The plan does not discuss the roles played by FAA and NASA and how their partnership will help reduce the rate of aviation fatalities. The discussion of performance goals and measures in DOT's fiscal year 2000 performance plan is a moderate improvement over the discussion in the fiscal year 1999 performance plan and shows some degree of progress in addressing the weaknesses that we identified in the fiscal year 1999 plan. We observed that the fiscal year 1999 plan could have been improved by (1) explaining how the management challenges are related to the rest of the performance plan and by including goals and specific measures for addressing the challenges; (2) consistently linking strategic goals, program activities, and performance goals; and (3) indicating interagency coordination for the crosscutting programs and consistently discussing the Department's contribution to these programs. Among the improvements, the fiscal year 2000 plan describes the management challenges facing the Department, explains activities that will be undertaken to address them, and provides page citations for specific performance goals that address the challenges discussed elsewhere in the plan. DOT's plan provides a specific discussion of the strategies and resources that the Department will use to achieve its performance goals. The plan covers each program activity in the Department's $51 billion proposed budget for fiscal year 2000. An appendix to the performance plan lists the Department's program activities and proposed funding levels by strategic goal. These funds are also mentioned in the discussions of strategic goals in the body of the plan. For each performance goal, the plan lists an overall strategy for achieving it, as well as specific activities and initiatives. For example, DOT expects to increase transit ridership through investments in transit infrastructure, financial assistance to metropolitan planning organizations and state departments of transportation for planning activities, research on improving train control systems, and fleet management to provide more customer service. However, our work has identified problems associated with some strategies. The plan identifies the rehabilitation of approximately 200 airport runways in the year 2000 as one of the activities contributing to the performance goal concerning the condition of runway pavement. We reported that there is a lack of information identifying the point at which rehabilitation or maintenance of pavement can be done before relatively rapid deterioration sets in. As a result, FAA is not in a position to determine which projects are being proposed at the most economical time. We have also reported on strategies for addressing the performance goal of reducing the rate of crashes at rail-grade crossings, some of which are included in the performance plan. For example, the plan addresses two strategies noted in our report--closing more railroad crossings and developing education and law enforcement programs--but does not address the installation of new technologies. For each performance goal, the plan also describes external factors, called special challenges, that can affect the Department's ability to accomplish the goal. For example, the performance goal for passenger vessel safety includes the external factors of (1) the remote and unforgiving environment at sea and human factors, which play an important role in maritime accidents; (2) the complexity of the operation and maintenance of passenger vessels; and (3) foreign and international standards that apply to vessels. The plan describes how particular programs, such as the marine safety program, will contribute to reducing the number of casualties associated with high-risk passenger vessels. The plan also indicates activities to address the external factors, including conducting oversight of technologically advanced vessels, such as high-speed ferries, and implementing and marketing the International Safety Management Code. In discussing corporate management strategies, the plan briefly describes how the Department plans to build, maintain, and marshal the resources, such as human capital, needed to achieve results and greater efficiency in departmental operations. The corporate strategies are broadly linked to the strategic goals. For example, the plan states that the human resource management strategy supports the strategic goals by ensuring that DOT's workforce has the required skills and competencies to support program challenges. The plan lists four key factors that will contribute to this corporate strategy: workforce planning that will identify the need for key occupations; managing diversity; learning and development activities to support employees' professional growth; and redesigning human resource management programs, such as personnel and payroll processing. In some cases, the plan lists specific programs under the corporate strategies but does not consistently identify the resources associated with them. For example, the plan discusses the completion of all remediation or appropriate contingency plans to make the computer systems ready for the year 2000 so that there are no critical system disruptions. However, there is no discussion of the resources needed to support this strategy. The discussion of strategies and resources in DOT's fiscal year 2000 performance plan is much improved over the fiscal year 1999 plan. We observed that the fiscal year 1999 plan generally did a good job of discussing the Department's strategies and resources for accomplishing its goals. However, we noted that the plan could have been improved in several ways, such as by more clearly describing the processes and resources required to meet the performance goals and recognizing additional external factors--such as demographic and economic trends that could affect the Department's ability to meet its goals. DOT's fiscal year 2000 plan contains such information. The Department's fiscal year 2000 performance plan generally provides a clear and comprehensive discussion of the performance information. The plan discusses the quality control procedures for verifying and validating data, which, it says, DOT managers follow as part of their daily activities, as well as an overall limitation to DOT's data--a lack of timeliness--and how the Department plans to compensate for this problem. In addition, for each performance measure, the plan provides a definition of the measure, data limitations and their implications for assessing performance, procedures to verify and validate data, the source database, and the baseline measure--or a reason why such information is missing. For example, the plan defines the performance measure for maritime oil spills--the gallons spilled per million gallons shipped--as counting only spills of less than 1 million gallons from regulated vessels and waterfront facilities and not counting other spills. The plan further explains that a limitation to the data is that they may underreport the amount spilled because they exclude nonregulated sources and major oil spills. However, the plan explains that large oil spills are excluded because they occur rarely, and, when they do occur, they would have an inordinate influence on statistical trends. The plan also explains that measuring only spills from regulated sources is more meaningful for program management. However, in some cases, we found additional problems with DOT's data systems that could limit the Department's ability to assess performance. For example, the performance measure for runway pavement condition--the percentage of runway pavements in good or fair condition--is collected under FAA's Airport Safety Data Program. We reported that this information provides only a general pavement assessment for all runways. This information is designed to inform airport users of the overall conditions of the airports, not to serve as a pavement management tool. We further noted that these assessments are made by safety inspectors who receive little training in how to examine pavement conditions. The performance plan acknowledges our concerns and states that FAA will update its guidance for inspecting and reporting the condition of runway pavement and will ensure that inspectors are aware of the guidance. However, as of March 1999, FAA had not updated its guidance for inspectors. According to the National Association of State Aviation Officials, which is under contract to FAA to conduct inspections and provide data on runway conditions, new guidance would require additional training for all inspectors, which is not provided for in the contract. In addition, we discuss problems with DOT's financial management information later in this report. The discussion of data issues in DOT's fiscal year 2000 performance plan is much improved over that in the fiscal year 1999 plan and is well on its way to addressing the weaknesses that we identified in the fiscal year 1999 plan. We observed that the fiscal year 1999 plan provided a general discussion of procedures to verify and validate data, which was not linked to specific measures in the plan. For most measures, information about the data's quality was lacking. Among the improvements in the fiscal year 2000 plan is detailed information about each performance measure, which includes information on verification, validation, and limitations. DOT is making good progress in setting results-oriented goals, developing measures to show progress, and establishing strategies to achieve those goals. However, the Department's progress in implementing performance-based management is impeded primarily by the lack of adequate financial management information. DOT has clearly made good progress in implementing performance-based management. The Department's September 1997 strategic plan and performance plan for fiscal year 1999 were both considered among the best in the federal government. And, as discussed in this report, DOT's fiscal year 2000 performance plan improves upon the fiscal year 1999 plan. Furthermore, our work has shown that prior to these Department-wide efforts, several of DOT's agencies made notable efforts in becoming performance-based. For example, in reviewing programs designated as pilots under the Results Act, we noted the successful progress of the Coast Guard's marine safety program. We reported that the Coast Guard's pilot program became more performance-based, changing its focus from outputs (such as the number of vessel inspections) to outcomes (saving lives). The Coast Guard's data on marine casualties indicated that accidents were often caused by human error--not by deficiencies in the vessels. Putting this information to use, the Coast Guard shifted its resources and realigned its processes away from inspections and toward other efforts to reduce marine casualties. We reported that the marine safety program not only improved its mission effectiveness--for example, the fatality rate in the towing industry declined significantly--but did so with fewer people and at lower cost. Additionally, in 1997, we cited the National Highway Traffic Safety Administration (NHTSA) as a good example of an agency that was improving the usefulness of performance information. The agency's fiscal year 1994 pilot performance report provided useful information by discussing the sources and, in some cases, the limitations of its performance data. In 1998, we again cited NHTSA as a good example of an agency that was developing performance measures for outcome goals that are influenced by external factors. Additionally, in 1997, we reported that the Federal Railroad Administration had shifted its safety program to focus on results--reducing railroad accidents, fatalities, and injuries--rather than the number of inspections and enforcement actions. The fiscal year 2000 performance plan indicates that the Department is taking further steps to instill performance-based management into its daily operations. According to the plan, DOT has incorporated all of its fiscal year 1999 performance goals into performance agreements between the administrators of DOT's agencies and the Secretary. At monthly meetings with the Deputy Secretary, the administrators are expected to report progress toward meeting these goals and program adjustments that may be undertaken throughout the year. Finally, some individual agencies in DOT have developed performance information that includes leading indicators associated with the Department-wide goals. For example, the Department's fiscal year 2000 budget submission for FAA's facilities and equipment includes 10 performance goals--such as reducing the rate of accidents or incidents in which an aircraft leaves the pavement--related to reducing the fatal accident rate for commercial air carriers. According to DOT's performance plan, such indicators will be used to help assess the results of DOT's programs and provide a basis for redirecting them. A key challenge that DOT faces in implementing performance-based management is the lack of accountability for its financial activities. In fact, serious accounting and financial reporting weaknesses at FAA led us to designate FAA's financial management as a high-risk area. From an overall perspective, DOT's accounting information system does not provide reliable information about the Department's financial performance. DOT's OIG has consistently reported that it has been unable to express an opinion on the reliability of DOT's financial statements because of, among other things, problems in the Department's accounting system. Although the fiscal year 1998 audit report stated that FAA is making significant progress, it cited deficiencies that include inaccurate general ledger balances and unreconciled discrepancies between the general ledger balances maintained in FAA's accounting system and subsidiary records. The OIG also cited problems with the Department's accounting systems that prevented the systems from complying with the requirements of the Federal Financial Management Improvement Act of 1996. The OIG concluded that for the Department's systems to comply with the requirements of the act, the Department needs, among other things, to modify its accounting system so that it is the only source of financial information for the consolidated financial statements. Concerns have also been expressed by the OIG about the number and total dollar amount of adjusting entries made outside the accounting system to prepare the financial statements. For example, FAA made 349 adjustments to its accounting records, which totaled $51 billion, in the process of manually preparing its fiscal year 1998 financial statement. DOT is taking actions to correct the financial reporting deficiencies that were identified by the OIG. On September 30, 1998, the Department submitted to the Office of Management and Budget (OMB) a plan that identified actions by DOT, especially FAA and the Coast Guard, to correct the weaknesses reported in the OIG's audits. For example, the plan called for DOT to complete physical counts of and develop appropriate support for the valuation of property, plant, equipment, and inventory at FAA and the Coast Guard. Furthermore, the Department's ability to implement performance management is limited by the lack of a reliable cost accounting system or an alternative means to accumulate costs. As a result, DOT's financial reports (1) may not be capturing the full cost of specific projects and activities and (2) may lack a reliable "Statement of Net Cost," which includes functional cost allocations. The lack of cost accounting information also limits the Department's ability to make effective decisions about resource needs and to adequately control the costs of major projects, such as FAA's $41 billion air traffic control modernization program. For example, without good cost accounting information, FAA cannot reliably measure the actual costs of its modernization program against established baselines, which impedes its ability to effectively estimate future costs. Finally, the lack of reliable cost information limits DOT's ability to evaluate performance in terms of efficiency and effectiveness, as called for by the Results Act. We provided the Department of Transportation (DOT) with the information contained in this report for review and comment. The Department stated that it appreciated our favorable review of its fiscal year 2000 performance plan and indicated that it had put much work into improving on the fiscal year 1999 plan by addressing our comments on that plan. DOT made several suggestions to clarify the discussion of its financial accounting system, which we incorporated. The Department acknowledged that work remains to be done to improve its financial accounting system and stated that it has established plans to do this. DOT also acknowledged the more general need for good data systems to implement the Results Act and indicated that it is working to enhance those systems. To assess the plan's usefulness for decisionmakers and maintain consistency with our approach in reviewing the fiscal year 1999 performance plan, we used criteria from our guide on performance goals and measures, strategies and resources, and verification and validation.This guide was developed from the Results Act's requirements for annual performance plans; guidelines contained in OMB Circular No. A-11, part 2; and other relevant documents. The criteria were supplemented by our report entitled Agency Performance Plans: Examples of Practices That Can Improve Usefulness to Decisionmakers (GAO/GGD/AIMD-99-69, Feb. 26, 1999), which builds on the opportunities for improvement that we identified in the fiscal year 1999 performance plans. In addition, we relied on our knowledge of DOT's operations and programs from our numerous reviews of the Department. To determine whether the performance plan covered the program activities set out in DOT's budget, we compared the plan with the President's fiscal year 2000 budget request for DOT. To determine whether the plan covered mission-critical management issues, we assessed whether the plan included goals, measures, or strategies to address major management challenges identified by us or the OIG. To identify the degree of improvement over the fiscal year 1999 plan, we compared the fiscal year 2000 plan with our observations on the previous plan. We performed our review in accordance with generally accepted government auditing standards from February through April 1999. We are providing the Honorable Rodney E. Slater, Secretary of Transportation, and the Honorable Jacob J. Lew, Director, OMB, with copies of this report. We will make copies available to others on request. If you or your staff have any questions about this report, please call me at (202) 512-2834. Major contributors to this report are listed in appendix II. In January 1999, we reported on major performance and management challenges that have limited the effectiveness of the Department of Transportation (DOT) in carrying out its mission. In December 1998, the Department's Office of Inspector General (OIG) issued a similar report on the Department. Table I.1 lists the issues covered in those two reports and the applicable goals and measures in the fiscal year 2000 performance plan. Acquisition of major aviation and U.S. Coast Guard systems lacks adequate management and planning. None. The plan, however, acknowledges that air traffic control modernization is a management issue that needs to be addressed. Furthermore, the plan states that DOT has formulated activities to address this issue. The Federal Aviation Administration's (FAA) $41 billion air traffic control modernization program has experienced cost overruns, delays, and performance shortfalls. The plan also identifies the Coast Guard's acquisition project as a management issue and describes activities to address it. The Coast Guard needs to more thoroughly address the justification and affordability of its $9.8 billion project to replace/modernize its ships and aircraft. (DOT's OIG also identified air traffic control modernization as a top priority management issue.) Important challenges remain in resolving FAA's Year 2000 risks. (The OIG also identified this area as a management issue.) None. However, the plan's corporate management strategies include an objective to complete all Year 2000 remediation or contingency plans so that there are no critical system disruptions. In addition, the plan states that the Year 2000 issue is a management challenge that needs to be addressed and identifies activities and milestones for addressing it. FAA and the nation's airports face funding uncertainties. DOT and the Congress face a challenge in reaching agreement on the amount and source of long-term financing for FAA and airports. (The OIG also identified this area as a management issue.) None. However, the plan identifies financing for FAA's activities as a major issue that the Department, the Congress, and the aviation community need to address. The plan also lists activities that FAA is undertaking to develop the information needed to make financing decisions. (continued) Aviation safety and security programs need strengthening. The plan includes performance goals to Shortcomings in aviation safety programs include the need for FAA to improve its oversight of the aviation industry, record complete information on inspections and enforcement actions, provide consistent information and adequate training for users of weather information, and resolve data protection issues to enhance the proactive use of recorded flight data to prevent accidents. reduce the fatal aviation accident rate for commercial air carriers and general aviation, reduce the number of runway incursions, reduce the rate of operational errors and deviations, FAA has encountered delays in implementing security initiatives at airports. Completing the initiatives will require additional funding and sustained commitment from FAA and the aviation industry. increase the detection rate for explosive devices and weapons that may be brought aboard aircraft, and FAA's computer security of its air traffic control systems is weak. get threat information to those who need to act within 24 hours. (The OIG also identified aviation safety and transportation security as management issues.) In addition, the plan's corporate management strategies include objectives to conduct vulnerability assessments on all new information technology systems to be deployed in fiscal year 2001 that fall under the purview of Presidential Decision Directive 63 and ensure that all DOT employees receive or have received general security awareness training in fiscal years 1999 or 2000 and that 60 percent of the systems administrators receive specialized security training by September 30, 2000. The plan also identifies computer security as a management challenge that needs to be addressed. A lack of aviation competition contributes to high fares and poor service for some communities. Increasing competition and improving air service will entail a range of solutions by DOT, the Congress, and the private sector. None. The plan identifies airline competition as a management challenge. DOT has submitted to the Congress a number of legislative proposals to address the issue. DOT needs to continue improving oversight of surface transportation projects. Many highway and transit projects continue to incur cost increases, experience delays, and have difficulties acquiring needed funding. None. The plan identifies surface transportation infrastructure needs as a management challenge and identifies activities to address the issue. (The OIG also identified this area as a management issue.) Amtrak's financial condition is tenuous. Since it began operations in 1971, Amtrak has received $22 billion in federal subsidies. Because there is no clear public policy that defines the role of passenger rail in the national transportation system and because Amtrak is likely to remain heavily dependent on federal assistance, the Congress needs to decide on the nation's expectations for intercity rail and the scope of Amtrak's mission in providing that service. None. The plan identifies the financial viability of Amtrak as a management challenge and states that, as a member of Amtrak's Board, DOT will work to address the issue. (The OIG also identified this area a management issue.) (continued) DOT's lack of accountability for its financial activities impairs its ability to manage programs and exposes the Department to potential waste, fraud, mismanagement, and abuse. Since 1993, the OIG has been unable to express an opinion on the reliability of the financial statements of certain agencies within the Department. DOT also lacks a cost accounting system or alternative means of accumulating the full costs of specific projects or activities. None. However, the plan's corporate management strategies include objectives to receive an "unqualified," or "clean," audit opinion on the Department's fiscal year 2000 consolidated financial statement and stand-alone financial statements; (The OIG also identified this area as a management issue.) enhance the efficiency of the accounting operation in a manner consistent with increased accountability and reliable reporting; and implement a pilot of the improved financial systems environment in at least one operating administration. The plan identifies financial accounting as a management challenge facing the Department and addresses key weaknesses that should be resolved before DOT can obtain a "clean" opinion in fiscal year 2000. DOT's plan includes performance goals to improving the Department's motor carrier safety program and taking prompt and meaningful enforcement actions for noncompliance, reduce the rate of fatalities involving large trucks, increase seat belt usage nationwide, increasing the level of safety of commercial trucks and drivers entering the United States from Mexico, reduce the rate of grade-crossing crashes, reduce the rate of rail-related fatalities for trespassers, reducing railroad grade-crossing and trespasser accidents, reduce the number of serious hazardous materials incidents in transportation, and improving compliance with safety regulations by entities responsible for transporting hazardous materials, and reduce the rate of rail-related crashes and fatalities. enhancing the effectiveness of the Federal Railroad Administration's Safety Assurance and Compliance Program. DOT needs to provide leadership to maintain, improve, and develop the port, waterway, and intermodal infrastructure to meet current and future needs. There is also a need to identify funding mechanisms to maintain and improve the harbor infrastructure of the United States. DOT's plan includes performance goals to reduce the percentage of ports reporting landside impediments to the flow of commerce and ensure the availability and long-term reliability of the St. Lawrence Seaway's locks and related navigation facilities in the St. Lawrence River. (continued) DOT faces several challenges in implementing the Government Performance and Results Act. Many of DOT's performance outcomes, such as improved safety, a reduction in fatalities and injuries, and well-maintained highways, depend in large part on actions by other federal agencies, states, and the transportation industry. Their assistance will be critical in meeting DOT's goals, which were developed under the Results Act. DOT's ability to achieve its goals will also be influenced by the effective utilization of human resources. None. The plan identifies the Department's implementation of the Results Act as a management challenge and mentions activities to address the issue. Helen Desaulniers The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. 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Pursuant to a congressional request, GAO provided information on the Department of Transportation's (DOT) performance plan for fiscal year (FY) 2000, focusing on: (1) the usefulness of DOT's plan in providing a clear picture of intended performance across the Department; (2) the strategies and resources that DOT will use to achieve its goals; and (3) whether DOT's performance information will be credible. GAO noted that: (1) overall, DOT's performance plan for FY 2000 should be a useful tool for decisionmakers; (2) it provides a clear picture of intended performance across the Department, a specific discussion of the strategies and resources that the Department will use to achieve its goals, and general confidence that the Department's performance information will be credible; (3) DOT's FY 2000 performance plan represents a moderate improvement over the FY 1999 plan in that it indicates some degree of progress in addressing the weaknesses that GAO identified in an assessment of the FY 1999 plan; (4) GAO observed that the FY 1999 plan did not: (a) sufficiently address management challenges facing the Department; (b) consistently link strategic goals, program activities, and performance goals; (c) indicate interagency coordination for crosscutting areas; or (d) provide sufficient information on external factors, the processes and resources for achieving the goals, and the performance data; (5) among the improvements in the FY 2000 plan are more consistent linkages among the program activities and performance goals, additional information on external factors and strategies for achieving the goals, and a more comprehensive discussion of the data's quality; (6) these improvements and other activities indicate that DOT has clearly made good progress in implementing performance-based management; (7) for example, the plan indicates that the Department is incorporating the performance goals into performance agreements between the administrators of DOT's agencies and the Secretary; (8) however, the plan still needs further improvement, especially in explaining how certain management challenges, such as financial management weaknesses, will be addressed; (9) for example, DOT's Office of Inspector General (OIG) reported that the Department's accounting system could not be used as the only source of financial information to prepare its financial statements; (10) while the FY 2000 plan does not address this issue, the Department has recognized the financial reporting deficiencies identified by the OIG and is taking actions to correct them; and (11) the lack of accountability for financial activities is a key challenge that DOT faces in implementing performance-based management.
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Public Law 108-18 was enacted after we reported on the results of our review of an analysis of the funded status of the Postal Service's CSRS pension obligations that OPM prepared at our request. This act adopted the administration's proposal that the Postal Service be responsible for funding the value of benefits attributable to military and volunteer service of all employees first hired into civilian service after June 30, 1971, and a pro-rata share of those benefits for employees hired before the July 1, 1971, effective date of the Postal Reorganization Act (PRA). In order to determine the funded status of the Postal Service's CSRS obligations, OPM estimated the portion of the Civil Service Retirement and Disability Fund (CSRDF) that was attributable to the Postal Service, taking into consideration all past CSRS-related payments to CSRDF by the Service and its employees, including earnings on those payments, and the Service's pro-rata share of all CSRS-related payments from CSRDF, including benefits attributable to military service, since July 1, 1971. The act also requires that the Postal Service begin funding the portion of CSRS dynamic normal cost not otherwise funded with employee withholdings. When calculated on a dynamic basis, normal cost represents an amount of money that if set aside during employees' working years will, with investment earnings, be sufficient to cover future benefits and expenses when due, so long as the plan's economic and demographic assumptions hold true. Dynamic normal cost reflects the effect of assumed future general pay increases and annuitant cost-of-living adjustments (COLA) on the amount of benefits that will be ultimately paid. Consequently, when a plan's dynamic normal cost is fully funded, unfunded liabilities due to inflation in salaries and annuity payments are avoided. This contrasts with static normal cost, wherein assumed future general pay increases and annuitant COLAs are not considered. With static funding, new unfunded liabilities are created as salary and annuity inflation actually occur. There are different actuarial methods for determining dynamic normal cost. OPM calculates the dynamic normal cost for the CSRS and FERS plans using an actuarial cost method - aggregate entry age normal - which expresses normal cost as a level percentage of aggregate basic pay for a group of new plan entrants. Consequently, this method allocates costs without regard to how benefits actually accrue. It is calculated by dividing the actuarial present value of expected future benefits a group of new plan entrants is expected to receive after retirement by the actuarial present value of the group's expected salaries over their working lives. OPM includes the past military service of new plan entrants in its calculation of expected future benefits. Consequently, OPM's aggregate entry age normal method allocates the cost of military service benefits proportionally over an employee's civilian career. For fiscal year 2003, the dynamic normal cost percentage for regular CSRS employees was 24.4 percent of basic pay, of which employees pay 7.0 percent and the Postal Service the remaining 17.4 percent. Similarly, the dynamic normal cost of FERS, currently 11.5 percent of basic pay for regular employees, is fully funded with employer contributions of 10.7 percent and employee withholdings of 0.8 percent. Public Law 108-18 also requires that starting on September 30, 2004, the Postal Service begin funding any projected underfunding of its CSRS obligations calculated by OPM as of September 30, 2003. This funding is to occur over a total of 40 years, with OPM recalculating the projected underfunding and the amortization payments as of the close of each subsequent fiscal year. In the event that a surplus exists as of September 30, 2025, the Postmaster General is required to submit a report to the Congress describing how the Postal Service proposes to use such surplus. By changing the funding of military service benefits, the act made the Postal Service (1) retroactively responsible for funding a portion of military service benefits that have already been paid to annuitants and funded by Treasury on a pay-as-you-go basis and (2) prospectively responsible for funding some or all of the military service benefits expected to be paid to current and future Postal Service annuitants. The cumulative effect of this change in law was to shift responsibility for funding approximately $27 billion (net present value as of September 30, 2002) in military service costs from taxpayers to postal ratepayers. The agencies made various arguments and assertions throughout their proposals, which we organize into the following four common, overarching issues: relationship of military service to employing agency operations, historical funding of CSRS benefits payable to Postal Service employees, applicability of FERS cost allocation and funding methods to CSRS, and funding of military service benefits by federal and other entities. The agencies' positions reflect their own perceptions of what is fair to the taxpayers and ratepayers and how the Postal Service should be treated vis- a-vis other federal agencies and considering its mandate to be self- supporting. As stated previously, in assessing the agencies' positions, we considered the accuracy of the various assertions presented, those aspects of equity and consistency raised by the agencies, the Postal Service's unique role in the financing of CSRS and FERS benefits, and its status as a self-supporting agency. The agencies' positions with respect to each of these issues, as well as our observations on them, are presented below. We presented the agencies' positions in the order that best framed the issue at hand. Military service has no relation to Postal Service operations, on which postal rates are based, and, in fact, had no relation to the operations of the former Post Office Department. Each of the federal employment services - military and civilian - have separate compensation, retirement benefit, and other benefits programs. Furthermore, the use of military service in the calculation of CSRS retirement benefits is a matter beyond the control of employer agencies. Receiving credit for past military service is a civilian retirement benefit that Postal Service employees receive just like other benefits, such as cost-of- living increases on annuitant benefit payments. Furthermore, individuals retiring from the Postal Service receive CSRS credit for their military service only because of their employment with the Postal Service. To a large extent, whether or not an employee's military service has any relationship to agency operations is a function of whether or not the Congress requires that agencies fund a portion of the costs related to this service. The positions noted above go beyond mandated financial responsibilities and seek to first define more specifically the nature and extent of this relationship before deciding on whether postal ratepayers or taxpayers should fund CSRS military service benefits. Clearly, any service that is creditable towards a CSRS or FERS benefit but is rendered while employed by an entity other than the Postal Service has no direct relationship to the Service's operations. This includes military service, service performed while employed by another agency and covered by CSRS or FERS, and service covered by another of the federal government's defined benefit retirement plans, but is subsequently credited towards a CSRS or FERS benefit upon an employee's acceptance of an appointment to a covered position and meeting other requirements. In addition to the uniformed services, a number of other federal agencies have compensation systems and benefit programs that are separate from those covering Postal Service employees. Having a retirement system that covers so many civilian employees and permitting the transfer of service between federal retirement systems promotes the portability of benefits, and so eases the movement of employees to other positions within the federal government. The crediting of military service towards a civilian service retirement benefit has been a feature of CSRS since it was established in 1920 and of FERS since it was established in 1986. This feature is one of many that collectively constitute a plan of benefits that defers a portion of an employee's total compensation until retirement. Agencies and other entities whose employees are covered by CSRS and FERS have no control over the features offered, among them employee elections such as whether to provide a survivor benefit to a spouse, because the plan's provisions are established by the plan sponsor, which in this case is the federal government. OPM and Treasury view military service of federal employees as related to employing agency operations by virtue of the fact that credit for such service is a feature of the CSRS and FERS plans in which the employees participate. They further note that it is only because an employee serves in a covered civilian position for a minimum of 5 years that the employee's military service can be used in the calculation of a CSRS or FERS benefit. The Postal Service's statements suggest a view of military service as involving the performance of duties unrelated to the delivery of the mail and further imply that any related compensation - including retirement benefits - should be paid for by the taxpayer. Defining this relationship is particularly important for the Postal Service because the costs associated with its retirees' service credits earned while employed by any other entity and which are not funded by the retiree while employed by the Postal Service must be passed onto postal ratepayers. This contrasts to those agencies that receive the vast majority of their funding through appropriations, where taxpayers ultimately fund all benefits regardless of whether and to what extent agencies recognize employee retirement costs in their budgets. One can reasonably argue that the cost of military service benefits would more equitably be borne by the entity that benefited from the military service (Department of Defense), which, in essence, would mean that taxpayers would ultimately bear these costs. The funding of military service benefits by the Treasury Department was a feature of a funding methodology established by law in 1969 that did not require employer agencies to fund the full cost of all benefits not otherwise funded by employees. The prior funding mechanism for the Postal Service under CSRS (including the special treatment of military service) was developed in piecemeal fashion that never fully addressed all of the factors that affect the costs of the system. The special treatment of military service that applied to Postal Service employees can be viewed as more of an historic accident than a deliberate policy choice. This is supported by the fact that each time a comprehensive system for funding federal annuities was developed there was no special treatment of military service. In view of the long history of congressional action, it is reasonable to assume that the Congress may have taken action to address the issues of excess interest earnings and the costs of military service, even if OPM had not identified the problems with the static funding methodology. Since 1969 the Treasury Department has been responsible for funding CSRS benefits attributable to military service. The Treasury Department remained responsible for funding these benefits for employees of all federal agencies even after laws had been subsequently enacted to make the Postal Service responsible for additional retirement costs attributable to its decisions and actions that result in increases in employee pay on which benefits are computed. Retroactively making the Postal Service responsible for funding military service benefits would result in a cost transfer of $27 billion to postal ratepayers, the great majority of which has already been paid for by Treasury. Furthermore, approximately 90 percent of the cost of military service was earned before the Postal Service was created in 1971. The fact that the Congress had not acted until just recently to make the Postal Service responsible for funding the creditable military service of its employees is taken by the opposing parties to mean different things, which they assert, not surprisingly, support their respective positions. Both parties acknowledge that, prior to P.L. 108-18, when previously presented with the opportunity to reconsider the Postal Service's funding of its employees' CSRS benefits, the Congress chose to leave Treasury responsible for funding all CSRS military service benefits. The Postal Service contends that the passage of successive legislation relating to the financing of its CSRS costs without ever requiring that it fund CSRS military service costs was the Congress's way of reaffirming its intention of having the Treasury fund these costs for Postal Service employees just as they do now for all other federal agency employees. OPM and Treasury contend that the piecemeal fashion with which the Congress made the Postal Service responsible for funding an increasing share of the CSRS benefits of its employees constitutes a pattern that indicates the Congress could have eventually made the Service responsible for military service costs. It is difficult to discern or even infer from the legislative history of the laws that preceded P.L. 108-18 any particular policy choice that can be seen as indicative of the Congress's future intentions or predictive of what ultimately led to enactment of P.L. 108-18. Any legislative action must be viewed within the context of the particular facts and circumstances that existed at the time the Congress was considering specific legislation, including budgetary and fiscal considerations. For these reasons, we consider both parties' arguments and assertions in connection with this point to be speculative and inconclusive. With respect to the Postal Service's assertion that approximately 90 percent of the cost of military service was earned before the Service was created in 1971, we asked OPM to calculate the additional cost to the Treasury of making it responsible for the entire cost of benefits attributable to all military service estimated to have been rendered before 1972 by both former and current employees of the Postal Service. OPM estimated the additional cost to be approximately 75 percent of the $27 billion total cost to Treasury to fund all CSRS military service benefits. Based on our review of the documentation provided by the Postal Service's actuarial consultants, it appears that the Service's assertion was meant to convey that approximately 90 percent of the military service in years allocated to it by OPM's pro-rata methodology was estimated to have occurred before 1972. The payment of military service costs for Postal Service employees is consistent with the funding of FERS, the funding system on which the new law was patterned. Although the method for funding CSRS benefits prior to P.L. 108-18 did not require the Postal Service to fund the cost of military service, it also did not contemplate that the actuarial gains or losses of the retirement system would be attributed to the Postal Service. Consequently, the Postal Service should not benefit from the positive experience of the CSRDF without assuming the other responsibilities that come with an approach that funds the full cost of all benefits, including military service. There is no identity between FERS funding and CSRS funding. FERS was created on a dynamically funded basis to phase out CSRS and to establish a more limited federal employment benefits program that would be fully funded by employees and employer agencies. CSRS is a totally different program from FERS, with different benefits and levels of contribution. In fact, CSRS was never fully funded by employees and employer agencies, with the exception of the Postal Service. Therefore, a change in funding methods that allows the Postal Service to receive credit for its share of higher than expected investment returns on contributions it made in accordance with the prior funding method does not justify the transfer of military service costs. There is no basis to substantiate this rationale either in accepted actuarial or financial practice. The agencies present opposing views on whether FERS funding requirements can or should be applied to CSRS benefits. Whether or not the obligation to fund military service benefits should be linked with the benefit of higher than expected investment returns is crucial to their respective arguments. There are numerous similarities and differences between CSRS and FERS, one difference being the manner and extent to which the full cost of plan benefits have been funded, including military service benefits. The fact that there are currently differences between CSRS and FERS benefits and funding requirements does not preclude changing how the Postal Service's contributions are calculated under CSRS to a method similar to FERS. That said, we also did not find any requirement that past military service be included in the dynamic normal cost factor used for funding purposes in order for the Postal Service to be treated as a separate employer for purposes of financing CSRS and, thus, benefit from past investment gains. In fact, there are actuarial methods that would fund the cost of military service benefits in a manner different than the one OPM currently uses. Therefore, there is nothing that inextricably links the past investment experience of the CSRDF to how military service benefits are funded. No agency other than the Postal Service - including other self-supporting agencies - fully funds the cost of its employees' CSRS benefits, including military service benefits. Furthermore, private sector companies are not responsible for funding military service costs. OPM and Treasury Position With respect to the argument that it is not fair to ask the Postal Service to finance the cost of military service because it would be the only agency required to do so, the fact that Treasury funds CSRS benefits attributable to military service rather than employer agencies merely shifts the timing of when the contributions are made and whether they are charged to a Treasury appropriation or to agency budgets. In either case, the costs would still ultimately be borne by the taxpayer. In contrast, one of the primary goals of the Postal Reorganization Act was to ensure that all of the Postal Service's costs are recovered through postal revenues, not taxpayer dollars. Therefore, all pension costs for employees that are attributable to service after the reorganization should be borne by the Postal Service. There are numerous government entities whose programs are required by law to be financed by the users of their services and that pay less than the portion of the CSRS dynamic normal cost not otherwise paid for by employee withholdings, including military service costs. These include the Federal Deposit Insurance Corporation (FDIC) and the Pension Benefit Guaranty Corporation (PBGC). However, there have also been a few entities that have either been required by law or have voluntarily chosen to fund the dynamic normal cost of employees who retained CSRS or FERS coverage. For example, the Metropolitan Washington Airports Act of 1986 required that the Metropolitan Washington Airports Authority (MWAA) pay the difference between the dynamic normal cost of CSRS benefits (including military service costs) and the contributions made by those career civilian employees of the Federal Aviation Administration who transferred to MWAA with the leasing of the Metropolitan Washington Airports in 1986. In addition, the Power Marketing Administrations (PMA) agreed to recover the dynamic normal cost of CSRS (including military service costs) through their power rates prospectively beginning in fiscal year 1998. The PMAs agreed to do so in response to a series of reports we issued. One might reasonably argue that the Postal Service should be treated like other agencies with respect to its funding of pension costs. However, the fact that other federal entities are not currently fully funding the government's share of CSRS normal costs does not necessarily support the argument that the Postal Service should not fund them. Likewise, it does not necessarily support the argument that other agencies start paying for these costs. Rather, it merely demonstrates the inconsistent treatment of agencies in this regard. Our long-standing position has been that employer agencies should fund the dynamic cost of the government's retirement programs not otherwise funded with employee withholdings and deposits. We also observed on numerous occasions that, as a result of charging less than the dynamic cost of CSRS not otherwise provided by employee withholdings, agencies whose operations are intended to be self-supporting receive large subsidies that are not recognized in the cost of their goods and services. However, our previous recommendations and observations did not specifically address whether the cost of military service benefits should be included as part of a dynamic normal cost factor. Nor did we examine the issue of whether the entity that benefited from the service should ultimately pay for any related benefits. Additionally, with the exception of self-supporting agencies that pay the dynamic cost of these benefits, taxpayers ultimately fund the benefits, regardless of whether these costs are included in individual agency budgets. Therefore, charging the self-supporting agencies' customers for the government's share of the dynamic normal cost of pension benefits results in real savings to the taxpayers and, therefore, is not just a change in the timing and source of funding. Regarding the Postal Service's statement that private sector companies are not responsible for military service costs, it is true that private sector companies are not required to give credit for past military service in their defined benefit pension plans. However, it should also be noted that the taxes these companies pay to the general fund of the Treasury are used to pay for various costs incurred by the federal government, including the military service benefits of military retirees and those employees who retired from agencies other than the Postal Service. The Postal Service is exempt from paying any corporate income taxes. The OPM and Treasury proposal presented five possible approaches for allocating the cost of benefits attributable to military service between the Treasury and the Postal Service. The Postal Service's position is that taxpayers, not postal ratepayers, should be responsible for the full cost of CSRS military service benefits, and it did not offer any other funding alternatives as part of its military service funding proposal. The information from the OPM and Treasury proposal is reprinted below in table 1. OPM calculated the estimated cost to the Treasury of each approach using the pro-rata approach to allocating military service set forth in P.L. 108-18 as the baseline. OPM's P.L. 108-18 pro-rata approach requires that the Postal Service fund (1) all CSRS military service benefits of employees hired into a civilian position after June 30, 1971, and (2) a pro-rata share of these benefits for employees hired before July 1, 1971. OPM estimated this pro-rata share of benefits by first allocating an employee's total creditable military service based on the ratio of pre-1971 civilian service to the total civilian service which the employee accrued both before and after the effective date of the Postal Reorganization Act. OPM's methodology also assumed that the Postal Service should be responsible for (1) the effect of post-1971 general pay increases and increasing benefit accrual rates on the final amount of military service benefits at retirement, including those military service credits allocated to the federal government, and (2) a proportional amount of post-1971 annuitant cost-of-living adjustments. These aspects of OPM's methodology apply to the second, third, and fourth funding alternatives presented in the OPM and Treasury proposal. The other two alternatives - Treasury pays the entire cost of military service or Postal Service pays the entire cost after September 30, 2002 - have the responsible agency funding all CSRS benefits attributable to military service, including all annuitant COLAs. Appendix B of the OPM and Treasury proposal provides examples of how an example retiree's benefit payment would be allocated into civilian and military service portions and how the federal government's share of those amounts would be determined for each of the funding alternatives. The total estimated additional cost to the Treasury for each funding alternative is equal to the difference between the projected funded status - or "supplemental liability" - of the current law pro-rata approach with that of each alternative. Appendix C of the OPM and Treasury proposal provides the net asset, present value of future benefits, and present value of future contributions components of the "supplemental liability" for each funding alternative. "Because military service only becomes creditable at the time when an employee actually retires, it would not be unreasonable to charge Postal Service for the entire amount of military service for all employees who retired from the Postal Service after June 30, 1971. It was only because these employees retired from the Postal Service that they received credit for their military service." "Civil Service rules required that to receive a regular retirement benefit the employees must have at least five years of civilian service and then attain additional age and service requirements." The rules governing the crediting of military service are established in law and regulation. Generally, military service can be used in the computation of any annuity after having completed 5 years of civilian service and if the following three conditions are met: (1) the military service was active and terminated under honorable conditions, (2) the military service was performed before separating from a civilian position covered by CSRS, and (3) the employee makes any required deposits. The OPM and Treasury statement that an employee must meet additional age and service requirements beyond the first 5 years to receive a regular (voluntary) retirement benefit is accurate, as is the statement that an employee must retire - in this case from the Postal Service - in order for military service to be counted in the computation of an annuity benefit. However, an employee is entitled to receive a disability retirement benefit at any age with 5 years of civilian service and a deferred annuity beginning at age 62 with 5 years of civilian service. Once employees meet the minimum years of civilian service necessary to be entitled to any type of annuity and meet the conditions listed above, they are entitled to have all of their military service included in the computation of their annuity. For purposes of determining how best to allocate CSRS military service benefits, it is important to note that OPM assumed that employees render military service prior to when they first enter civilian service. This leads to the presumption that the military service credits of many of the Postal Service's retirees were already creditable towards an annuity by the time the Service commenced operations in 1971. Yet, for purposes of estimating the Postal Service's share of the CSRS portion of CSRDF assets and the actuarial present value of future benefits, OPM allocated the years of creditable military service of former and current Postal Service employees proportionally over the employees' civilian career. For example, an employee who retired in 1991 with 10 years of civilian service before July 1, 1971, and 20 years after June 30, 1971, would have two-thirds of any military service allocated to the Postal Service, even though OPM assumes that all military service was rendered before the employee was hired into a covered civilian position. Consequently, this example employee's military service would have been creditable towards a civilian pension benefit before the Postal Service commenced operations. The OPM and Treasury proposal did not include an allocation alternative that reflects the extent to which military service became creditable after the Postal Service commenced operations. The scoring of each alternative approach to funding military service hinges on how Postal Service would spend any additional savings. The Postal Service was required by P.L. 108-18 to submit a proposal detailing how it would expend any savings accruing to it after fiscal year 2005 as a result of enactment of P.L. 108-18. In that separate proposal, the Postal Service provided two alternatives to spending any savings. The first alternative assumes the responsibility for funding the CSRS military service benefits of its current and former employees will return to the Treasury, while the other alternative assumes that the Postal Service will retain this responsibility as defined under P.L. 108-18. Consequently, we present our estimates of the budgetary implications of only these two military service funding alternatives in our companion report on the results of our mandated review of the Postal Service's savings plan proposal. This report is entitled Postal Pension Funding Reform: Issues Related to the Postal Service's Proposed Use of Pension Savings, GAO-04-238. The agencies made various arguments as to which agency - Postal Service or Treasury - should fund the cost of CSRS military service benefits. We made various observations that considered the accuracy of the various assertions presented, those aspects of equity and consistency raised by the agencies, the Postal Service's unique role in the financing of CSRS and FERS benefits, and its status as a self-supporting agency. Ultimately, the Congress must make this decision. Should the Congress decide that the Postal Service should be responsible for funding CSRS military service benefits attributable to its employees, the Congress should then decide the extent to which these benefits should be attributed to the Postal Service and perhaps to other self-supporting agencies. Even if the Congress decides that self-supporting agencies should not be required to fund CSRS military service benefits, the Congress should still consider whether these agencies should be required to fund the dynamic normal cost of their CSRS employees' benefits that excludes the military service component. The OPM and Treasury proposal provided five alternative allocation approaches; however, none of their approaches included an allocation alternative that reflects the extent to which the Postal Service's current and former employees had, by the time the Service commenced operations in 1971, completed the 5 years of civilian service needed to be entitled to have their past military service credits used in the computation of an annuity. This alternative would provide an estimate of Postal Service's obligation that includes only military service benefits that became creditable after the Postal Service commenced operations. To help promote full and consistent funding of CSRS benefits among self- supporting federal agencies, we suggest that the Congress consider requiring all self-supporting federal entities to pay the dynamic cost of employee pension benefit costs not paid for by employee contributions and deposits, excluding military service costs, and treating all self-supporting federal entities consistently with regard to whatever decision is made on Postal Service funding of the military service component of CSRS employee benefits. If the Congress decides that the Postal Service should be responsible for military service costs associated with its employees, we recommend that OPM provide the Congress with estimates of the additional cost to the Treasury of making the Postal Service responsible only for employee military service that became creditable after June 30, 1971. In written comments on a draft of this report the Postmaster General expressed concern with what he saw as an inference that the Postal Service should be responsible for the cost of an employee's military service because it hires the employee knowing of the past military service. The Postmaster General also reaffirmed the Postal Service's commitment to the fundamental policy of veterans' preferences. Our report did not imply that knowing of past military service was a relevant factor in determining whether the Postal Service should bear this cost, but rather simply stated the fact that the right to receive credit for past military service arises only as a result of employment in a civilian position covered by CSRS or FERS. The Postmaster General also stated that our suggestion that the Congress consider requiring all self-supporting entities to fund the dynamic costs of employee pension benefits is not an issue for the Postal Service because it began doing so as of April 2003. Our report states that there are other self- supporting agencies that are not required to fund military service costs and do not otherwise fully fund the dynamic normal cost of their CSRS employees' benefits as the Postal Service is now required to do. We highlighted this difference in funding requirements to illustrate an inconsistency that the Congress may want to consider as it contemplates CSRS employee benefits funding by the Postal Service. The Postmaster General's written comments are reprinted in appendix III. In written comments on a draft of this report, the Secretary of the Treasury and Director of OPM disagreed with our statement that there is no direct relationship between an employee's prior military service and the operations of the Postal Service. They stated that granting credit for military service in calculating civilian pensions enables the Postal Service to recruit and retain veterans, who provide direct benefits to the operations of their employer. We agree that the crediting of military service facilitates the recruitment and retention of veterans who, subsequent to their military service, contribute to postal operations. However, we continue to view the relationship between military service and postal operations as indirect because the activities performed while serving in the military did not directly contribute to the daily operations of the Postal Service at the time the military service was rendered. In their comment letter, the Secretary of the Treasury and Director of OPM also provided certain clarifications with respect to their policy positions and beliefs. For example, they stated that their estimate, made at our request, of the value of benefit costs due to military service before 1971 includes all increases in the value of those benefits that resulted from pay raises granted by the Postal Service, but that they do not endorse this method, especially insofar as it permits Postal Service pay increases to then increase the cost allocated to the Treasury. We do not endorse this or any other cost allocation method. As stated in our report, our position is that the Congress needs to decide whether the Postal Service should fund the cost of military service attributable to military service of its current and former employees. If the Congress decides that the Postal Service should fund these costs, then it needs to decide which method to use in allocating costs to the Postal Service. The written comments from the Secretary of the Treasury and Director of OPM are reprinted in appendix IV. We are sending copies of this report to the Director of the Office of Personnel Management, the Postmaster General, the Secretary of the Treasury, the Director of the Office of Management and Budget, and other interested parties. We are also sending this report to the Honorable John M. McHugh, House of Representatives, as the Chairman of the Special Panel on Postal Reform and Oversight, House Committee on Government Reform. The report is also available at no charge on GAO's home page at http://wwww.gao.gov. If you have any questions about this report, please contact Linda Calbom, Director, Financial Management and Assurance, at (202) 512-8341, or Robert Martin, Acting Director, at (202) 512-6131. You may reach them by e-mail at [email protected] and [email protected]. Other key contributors to this report were Joseph Applebaum, Richard Cambosos, Lisa Crye, Frederick Evans, Darren Goode, Scott McNulty, and Brooke Whittaker. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO's Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. 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The Postal Civil Service Retirement System Funding Reform Act of 2003 (the Act) required the United States Postal Service, Department of the Treasury, and Office of Personnel Management (OPM) to prepare proposals detailing whether and to what extent the Treasury and Postal Service should fund the benefits attributable to the military service of the Postal Service's current and former Civil Service Retirement System (CSRS) employees. The Act required GAO to evaluate the proposals. Our objective in doing so was to assess the agencies' positions and provide additional information where it may be useful. The positions taken by OPM and Treasury and the Postal Service were driven in part by differing views on the nature and extent of the relationship between military service and an entity's operations. The Postal Service favors returning the responsibility for funding benefits attributable to military service to the Treasury, making arguments that include Treasury's historic responsibility for these benefits, the legislative history surrounding the Postal Service's funding of retirement benefits, the fact that the majority of military service by CSRS employees was rendered before the current Postal Service was created, and that military service has no connection to the Postal Service's functions or operations. OPM and Treasury favor the recently enacted law, arguing that the Postal Service was intended to be self-supporting, military service is a benefit like other CSRS benefits that should be allocated proportionally over an employee's career, and the current law is one in a series that developed today's approach to funding the Postal Service's CSRS costs. GAO observed that there is no direct relationship between an employee's military service and an entity's operations, but an indirect relationship is established once an employee is hired into a position whose retirement plan provisions credit military service when computing a civilian benefit. GAO has long held the position that federal entities should be charged the full costs of retirement benefits not covered by employee contributions in the belief that it enhances recognition of costs and budgetary discipline at the same time it promotes sounder fiscal and legislative decisions. However, our previous recommendations and matters for congressional consideration did not specifically address whether the cost of military service benefits should be included in CSRS employee benefit costs. Currently there is inconsistency in how various self-supporting government entities treat these costs. The military service of many Postal Service retirees was already creditable to a civilian pension when the Postal Service began operations in 1971. OPM's current approach, however, allocated the years of creditable military service of these employees over their entire civilian careers. If Congress decides that the Postal Service should be responsible for military service costs applicable to its employees, then consideration of an allocation alternative reflecting the extent to which the military service of current and former employees was already creditable towards a civilian pension when the Postal Service began operating would enhance the decision-making process.
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In our June 2006 report, we found that DOD and VA had taken actions to facilitate the transition of medical and rehabilitative care for seriously injured servicemembers who were being transferred from MTFs to PRCs. For example, in April 2004, DOD and VA signed a memorandum of agreement that established referral procedures for transferring injured servicemembers from DOD to VA medical facilities. DOD and VA also established joint programs to facilitate the transfer to VA medical facilities, including a program that assigned VA social workers to selected MTFs to coordinate transfers. Despite these coordination efforts, we found that DOD and VA were having problems sharing the medical records VA needed to determine whether servicemembers' medical conditions allowed participation in VA's vigorous rehabilitation activities. DOD and VA reported that as of December 2005 two of the four PRCs had real-time access to the electronic medical records maintained at Walter Reed Army Medical Center and only one of the two also had access to the records at the National Naval Medical Center. In cases where medical records could not be accessed electronically, the MTF faxed copies of some medical information, such as the patient's medical history and progress notes, to the PRC. Because this information did not always provide enough data for the PRC provider to determine if the servicemember was medically stable enough to be admitted to the PRC, VA developed a standardized list of the minimum types of health care information needed about each servicemember transferring to a PRC. Even with this information, PRC providers frequently needed additional information and had to ask for it specifically. For example, if the PRC provider notices that the servicemember is on a particular antibiotic therapy, the provider may request the results of the most recent blood and urine cultures to determine if the servicemember is medically stable enough to participate in strenuous rehabilitation activities. According to PRC officials, obtaining additional medical information in this way, rather than electronically, is very time consuming and often requires multiple phone calls and faxes. VA officials told us that the transfer could be more efficient if PRC medical personnel had real- time access to the servicemembers' complete DOD electronic medical records from the referring MTFs. However, problems existed even for the two PRCs that had been granted electronic access. During a visit to those PRCs in April 2006, we found that neither facility could access the records at Walter Reed Army Medical Center because of technical difficulties. As discussed in our January 2005 report, the importance of early intervention for returning individuals with disabilities to the workforce is well documented in vocational rehabilitation literature. In 1996, we reported that early intervention significantly facilitates the return to work but that challenges exist in providing services early. For example, determining the best time to approach recently injured servicemembers and gauge their personal receptivity to considering employment in the civilian sector is inherently difficult. The nature of the recovery process is highly individualized and requires professional judgment to determine the appropriate time to begin vocational rehabilitation. Our 2007 High-Risk Series: An Update designates federal disability programs as "high risk" because they lack emphasis on the potential for vocational rehabilitation to return people to work. In our January 2005 report, we found that servicemembers whose disabilities are definitely or likely to result in military separation may not be able to benefit from early intervention because DOD and VA could work at cross purposes. In particular, DOD was concerned about the timing of VA's outreach to servicemembers whose discharge from military service is not yet certain. DOD was concerned that VA's efforts may conflict with the military's retention goals. When servicemembers are treated as outpatients at a VA or military hospital, DOD generally begins to assess whether the servicemember will be able to remain in the military. This process can take months. For its part, VA took steps to make seriously injured servicemembers a high priority for all VA assistance. Noting the importance of early intervention, VA instructed its regional offices in 2003 to assign a case manager to each seriously injured servicemember who applies for disability compensation. VA had detailed staff to MTFs to provide information on all veterans' benefits, including vocational rehabilitation, and reminded staff that they can initiate evaluation and counseling, and, in some cases, authorize training before a servicemember is discharged. While VA tries to prepare servicemembers for a transition to civilian life, VA's outreach process may overlap with DOD's process for evaluating servicemembers for a possible return to duty. In our report, we concluded that instead of working at cross purposes to DOD goals, VA's early intervention efforts could facilitate servicemembers' return to the same or a different military occupation, or to a civilian occupation if the servicemembers were not able to remain in the military. In this regard, the prospect for early intervention with vocational rehabilitation presents both a challenge and an opportunity for DOD and VA to collaborate to provide better outcomes for seriously injured servicemembers. In our May 2006 report, we described DOD's efforts to identify and facilitate care for OEF/OIF servicemembers who may be at risk for PTSD. To identify such servicemembers, DOD uses a questionnaire, the DD 2796, to screen OEF/OIF servicemembers after their deployment outside of the United States has ended. The DD 2796 is used to assess servicemembers' physical and mental health and includes four questions to identify those who may be at risk for developing PTSD. We reported that according to a clinical practice guideline jointly developed by DOD and VA, servicemembers who responded positively to at least three of the four PTSD screening questions may be at risk for developing PTSD. DOD health care providers review completed questionnaires, conduct face-to-face interviews with servicemembers, and use their clinical judgment in determining which servicemembers need referrals for further mental health evaluations. OEF/OIF servicemembers can obtain the mental health evaluations, as well as any necessary treatment for PTSD, while they are servicemembers--that is, on active duty--or when they transition to veteran status if they are discharged or released from active duty. Despite DOD's efforts to identify OEF/OIF servicemembers who may need referrals for further mental health evaluations, we reported that DOD cannot provide reasonable assurance that OEF/OIF servicemembers who need the referrals receive them. Using data provided by DOD, we found that 22 percent, or 2,029, of the 9,145 OEF/OIF servicemembers in our review who may have been at risk for developing PTSD were referred by DOD health care providers for further mental health evaluations. Across the military service branches, DOD health care providers varied in the frequency with which they issued referrals to OEF/OIF servicemembers with three or more positive responses to the PTSD screening questions------ the Army referred 23 percent, the Air Force about 23 percent, the Navy 18 percent, and the Marines about 15 percent. According to DOD officials, not all of the OEF/OIF servicemembers with three or four positive responses on the screening questionnaire need referrals. As directed by DOD's guidance for using the DD 2796, DOD health care providers are to rely on their clinical judgment to decide which of these servicemembers need further mental health evaluations. However, at the time of our review DOD had not identified the factors its health care providers used to determine which OEF/OIF servicemembers needed referrals. Knowing these factors could explain the variation in referral rates and allow DOD to provide reasonable assurance that such judgments are being exercised appropriately. We recommended that DOD identify the factors that DOD health care providers used in issuing referrals for further mental health evaluations to explain provider variation in issuing referrals. DOD concurred with the recommendation. Although OEF/OIF servicemembers may obtain mental health evaluations or treatment for PTSD through VA when they transition to veteran status, VA may face a challenge in meeting the demand for PTSD services. In September 2004 we reported that VA had intensified its efforts to inform new veterans from the Iraq and Afghanistan conflicts about the health care services--including treatment for PTSD--VA offers to eligible veterans. We observed that these efforts, along with expanded availability of VA health care services for Reserve and National Guard members, could result in an increased percentage of veterans from Iraq and Afghanistan seeking PTSD services through VA. However, at the time of our review officials at six of seven VA medical facilities we visited explained that while they were able to keep up with the current number of veterans seeking PTSD services, they may not be able to meet an increase in demand for these services. In addition, some of the officials expressed concern because facilities had been directed by VA to give veterans from the Iraq and Afghanistan conflicts priority appointments for health care services, including PTSD services. As a result, VA medical facility officials estimated that follow-up appointments for veterans receiving care for PTSD could be delayed. VA officials estimated the delays to be up to 90 days. As discussed in our April 2006 testimony, problems related to military pay have resulted in overpayments and debt for hundreds of sick and injured servicemembers. These pay problems resulted in significant frustration for the servicemembers and their families. We found that hundreds of battle-injured servicemembers were pursued for repayment of military debts through no fault of their own, including at least 74 servicemembers whose debts had been reported to credit bureaus and private collections agencies. In response to our audit, DOD officials said collection actions on these servicemembers' debts had been suspended until a determination could be made as to whether these servicemembers' debts were eligible for relief. Debt collection actions created additional hardships on servicemembers by preventing them from getting loans to buy houses or automobiles or pay off other debt, and sending several servicemembers into financial crisis. Some battle-injured servicemembers forfeited their final separation pay to cover part of their military debt, and they left the service with no funds to cover immediate expenses while facing collection actions on their remaining debt. We also found that sick and injured servicemembers sometimes went months without paychecks because debts caused by overpayments of combat pay and other errors were offset against their military pay. Furthermore, the longer it took DOD to stop the overpayments, the greater the amount of debt that accumulated for the servicemember and the greater the financial impact, since more money would eventually be withheld from the servicemember's pay or sought through debt collection action after the servicemember had separated from the service. In our 2005 testimony about Army National Guard and Reserve servicemembers, we found that poorly defined requirements and processes for extending injured and ill reserve component servicemembers on active duty have caused servicemembers to be inappropriately dropped from active duty. For some, this has led to significant gaps in pay and health insurance, which has created financial hardships for these servicemembers and their families. Mr. Chairman, this completes my prepared remarks. I would be happy to respond to any questions you or other members of the subcommittee may have at this time. For further information about this testimony, please contact Cynthia A. Bascetta at (202) 512-7101 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Michael T. Blair, Jr., Assistant Director; Cynthia Forbes; Krister Friday; Roseanne Price; Cherie' Starck; and Timothy Walker made key contributions to this statement. High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 2007. VA and DOD Health Care: Efforts to Provide Seamless Transition of Care for OEF and OIF Servicemembers and Veterans. GAO-06-794R. Washington, D.C.: June 30, 2006. Post-Traumatic Stress Disorder: DOD Needs to Identify the Factors Its Providers Use to Make Mental Health Evaluation Referrals for Servicemembers. GAO-06-397. Washington, D.C.: May 11, 2006. Military Pay: Military Debts Present Significant Hardships to Hundreds of Sick and Injured GWOT Soldiers. GAO-06-657T. Washington, D.C.: April 27, 2006. Military Disability System: Improved Oversight Needed to Ensure Consistent and Timely Outcomes for Reserve and Active Duty Service Members. GAO-06-362. Washington, D.C.: March 31, 2006. Military Pay: Gaps in Pay and Benefits Create Financial Hardships for Injured Army National Guard and Reserve Soldiers. GAO-05-322T. Washington, D.C.: February 17, 2005. Vocational Rehabilitation: More VA and DOD Collaboration Needed to Expedite Services for Seriously Injured Servicemembers. GAO-05-167. Washington, D.C.: January 14, 2005. VA and Defense Health Care: More Information Needed to Determine If VA Can Meet an Increase in Demand for Post-Traumatic Stress Disorder Services. GAO-04-1069. Washington, D.C.: September 20, 2004. SSA Disability: Return-to-Work Strategies from Other Systems May Improve Federal Programs. GAO/HEHS-96-133. Washington, D.C.: July 11, 1996. 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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As of March 1, 2007, over 24,000 servicemembers have been wounded in action since the onset of Operation Enduring Freedom (OEF) and Operation Iraqi Freedom (OIF), according to the Department of Defense (DOD). GAO work has shown that servicemembers injured in combat face an array of significant medical and financial challenges as they begin their recovery process in the health care systems of DOD and the Department of Veterans Affairs (VA). GAO was asked to discuss concerns regarding DOD and VA efforts to provide medical care and rehabilitative services for servicemembers who have been injured during OEF and OIF. This testimony addresses (1) the transition of care for seriously injured servicemembers who are transferred between DOD and VA medical facilities, (2) DOD's and VA's efforts to provide early intervention for rehabilitation for seriously injured servicemembers, (3) DOD's efforts to screen servicemembers at risk for post-traumatic stress disorder (PTSD) and whether VA can meet the demand for PTSD services, and (4) the impact of problems related to military pay on injured servicemembers and their families. This testimony is based on GAO work issued from 2004 through 2006 on the conditions facing OEF/OIF servicemembers at the time the audit work was completed. Despite coordinated efforts, DOD and VA have had problems sharing medical records for servicemembers transferred from DOD to VA medical facilities. GAO reported in 2006 that two VA facilities lacked real-time access to electronic medical records at DOD facilities. To obtain additional medical information, facilities exchanged information by means of a time-consuming process resulting in multiple faxes and phone calls. In 2005, GAO reported that VA and DOD collaboration is important for providing early intervention for rehabilitation. VA has taken steps to initiate early intervention efforts, which could facilitate servicemembers' return to duty or to a civilian occupation if the servicemembers were unable to remain in the military. However, according to DOD, VA's outreach process may overlap with DOD's process for evaluating servicemembers for a possible return to duty. DOD was also concerned that VA's efforts may conflict with the military's retention goals. In this regard, DOD and VA face both a challenge and an opportunity to collaborate to provide better outcomes for seriously injured servicemembers. DOD screens servicemembers for PTSD but, as GAO reported in 2006, it cannot ensure that further mental health evaluations occur. DOD health care providers review questionnaires, interview servicemembers, and use clinical judgment in determining the need for further mental health evaluations. However, GAO found that 22 percent of the OEF/OIF servicemembers in GAO's review who may have been at risk for developing PTSD were referred by DOD health care providers for further evaluations. According to DOD officials, not all of the servicemembers at risk will need referrals. However, at the time of GAO's review DOD had not identified the factors its health care providers used to determine which OEF/OIF servicemembers needed referrals. Although OEF/OIF servicemembers may obtain mental health evaluations or treatment for PTSD through VA, VA may face a challenge in meeting the demand for PTSD services. VA officials estimated that follow-up appointments for veterans receiving care for PTSD may be delayed up to 90 days. GAO's 2006 testimony pointed out problems related to military pay have resulted in debt and other hardships for hundreds of sick and injured servicemembers. Some servicemembers were pursued for repayment of military debts through no fault of their own. As a result, servicemembers have been reported to credit bureaus and private collections agencies, been prevented from getting loans, gone months without paychecks, and sent into financial crisis. In a 2005 testimony GAO reported that poorly defined requirements and processes for extending the active duty of injured and ill reserve component servicemembers have caused them to be inappropriately dropped from active duty, leading to significant gaps in pay and health insurance for some servicemembers and their families.
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Critical infrastructures are systems and assets, whether physical or virtual, so vital to our nation that their incapacity or destruction would have a debilitating impact on national security, economic well-being, pubic health or safety, or any combination of these. Critical infrastructure includes, among other things, banking and financial institutions, telecommunications networks, and energy production and transmission facilities, most of which are owned by the private sector. As these critical infrastructures have become increasingly dependent on computer systems and networks, the interconnectivity between information systems, the Internet, and other infrastructures creates opportunities for attackers to disrupt critical systems, with potentially harmful effects. Because the private sector owns most of the nation's critical infrastructures, forming effective partnerships between the public and private sectors is vital to successfully protect cyber-reliant critical assets from a multitude of threats, including terrorists, criminals, and hostile nations. Federal law and policy have established roles and responsibilities for federal agencies to work with the private sector and other entities in enhancing the cyber and physical security of critical public and private infrastructures. These policies stress the importance of coordination between the government and the private sector to protect the nation's computer-reliant critical infrastructure. In addition, they establish the Department of Homeland Security (DHS) as the focal point for the security of cyberspace--including analysis, warning, information sharing, vulnerability reduction, mitigation efforts, and recovery efforts for public and private critical infrastructure and information systems. Federal policy also establishes critical infrastructure sectors, assigns federal agencies to each sector (known as sector lead agencies), and encourages private sector involvement. Table 1 shows the 18 critical infrastructure sectors and the lead agencies assigned to each sector. In May 1998, Presidential Decision Directive 63 (PDD-63) established critical infrastructure protection as a national goal and presented a strategy for cooperative efforts by the government and the private sector to protect the physical and cyber-based systems essential to the minimum operations of the economy and the government. Among other things, this directive encouraged the development of information sharing and analysis centers (ISAC) to serve as mechanisms for gathering, analyzing, and disseminating information on cyber infrastructure threats and vulnerabilities to and from owners and operators of the sectors and the federal government. For example, the Financial Services, Electricity Sector, IT, and Communications ISACs represent sectors or subcomponents of sectors. The Homeland Security Act of 2002 created the Department of Homeland Security. Among other things, DHS was assigned with the following critical infrastructure protection responsibilities: (1) developing a comprehensive national plan for securing the key resources and critical infrastructures of the United States, (2) recommending measures to protect those key resources and critical infrastructures in coordination with other groups, and (3) disseminating, as appropriate, information to assist in the deterrence, prevention, and preemption of or response to terrorist attacks. In 2003, the National Strategy to Secure Cyberspace was issued, which assigned DHS multiple leadership roles and responsibilities in protecting the nation's cyber critical infrastructure. These include (1) developing a comprehensive national plan for critical infrastructure protection; (2) developing and enhancing national cyber analysis and warning capabilities; (3) providing and coordinating incident response and recovery planning, including conducting incident response exercises; (4) identifying, assessing, and supporting efforts to reduce cyber threats and vulnerabilities, including those associated with infrastructure control systems; and (5) strengthening international cyberspace security. PDD-63 was superseded in December 2003 when Homeland Security Presidential Directive 7 (HSPD-7) was issued. HSPD-7 defined additional responsibilities for DHS, sector-specific agencies, and other departments and agencies. The directive instructs sector-specific agencies to identify, prioritize, and coordinate the protection of critical infrastructures to prevent, deter, and mitigate the effects of attacks. It also makes DHS responsible for, among other things, coordinating national critical infrastructure protection efforts and establishing uniform policies, approaches, guidelines, and methodologies for integrating federal infrastructure protection and risk management activities within and across sectors. As part of its implementation of the cyberspace strategy and other requirements to establish cyber analysis and warning capabilities for the nation, DHS established the United States Computer Emergency Readiness Team (US-CERT) to help protect the nation's information infrastructure. US-CERT is the focal point for the government's interaction with federal and private-sector entities 24 hours a day, 7 days a week, and provides cyber-related analysis, warning, information-sharing, major incident response, and national-level recovery efforts. Threats to systems supporting critical infrastructure are evolving and growing. In February 2011, the Director of National Intelligence testified that, in the past year, there had been a dramatic increase in malicious cyber activity targeting U.S. computers and networks, including a more than tripling of the volume of malicious software since 2009. Different types of cyber threats from numerous sources may adversely affect computers, software, networks, organizations, entire industries, or the Internet itself. Cyber threats can be unintentional or intentional. Unintentional threats can be caused by software upgrades or maintenance procedures that inadvertently disrupt systems. Intentional threats include both targeted and untargeted attacks from a variety of sources, including criminal groups, hackers, disgruntled employees, foreign nations engaged in espionage and information warfare, and terrorists. The potential impact of these threats is amplified by the connectivity between information systems, the Internet, and other infrastructures, creating opportunities for attackers to disrupt telecommunications, electrical power, and other critical services. For example, in May 2008, we reported that the Tennessee Valley Authority's (TVA) corporate network contained security weaknesses that could lead to the disruption of control systems networks and devices connected to that network. We made 19 recommendations to improve the implementation of information security program activities for the control systems governing TVA's critical infrastructures and 73 recommendations to address specific weaknesses in security controls. TVA concurred with the recommendations and has taken steps to implement them. As government, private sector, and personal activities continue to move to networked operations, the threat will continue to grow. Recent reports of cyber attacks illustrate that the cyber-based attacks on cyber-reliant critical infrastructures could have a debilitating impact on national and economic security. In June 2011, a major bank reported that hackers broke into its systems and gained access to the personal information of hundreds of thousands of customers. Through the bank's online banking system, the attackers were able to view certain private customer information. In March 2011, according to the Deputy Secretary of Defense, a cyber attack on a defense company's network captured 24,000 files containing Defense Department information. He added that nations typically launch such attacks, but there is a growing risk of terrorist groups and rogue states developing similar capabilities. In March 2011, a security company reported that it had suffered a sophisticated cyber attack that removed information about its two- factor authentication tool. According to the company, the extracted information did not enable successful direct attacks on any of its customers; however, the information could potentially be used to reduce the effectiveness of a current two-factor authentication implementation as part of a broader attack. In February 2011, media reports stated that computer hackers broke into and stole proprietary information worth millions of dollars from the networks of six U.S. and European energy companies. In July 2010, a sophisticated computer attack, known as Stuxnet, was discovered. It targeted control systems used to operate industrial processes in the energy, nuclear, and other critical sectors. It is designed to exploit a combination of vulnerabilities to gain access to its target and modify code to change the process. In January 2010, it was reported that at least 30 technology companies--most in Silicon Valley, California--were victims of intrusions. The cyber attackers infected computers with hidden programs allowing unauthorized access to files that may have included the companies' computer security systems, crucial corporate data, and software source code. Over the past 2 years, the federal government has taken a number of steps aimed at addressing cyber threats to critical infrastructure. In early 2009, the President initiated a review of the nation's cyberspace policy that specifically assessed the missions and activities associated with the nation's information and communication infrastructure and issued the results in May of that year. The review resulted in 24 near- and mid- term recommendations to address organizational and policy changes to improve the current U.S. approach to cybersecurity. These included, among other things, that the President appoint a cybersecurity policy official for coordinating the nation's cybersecurity policies and activities. In December 2009, the President appointed a Special Assistant to the President and Cybersecurity Coordinator to serve in this role and act as the central coordinator for the nation's cybersecurity policies and activities. Among other things, this official is to chair the primary policy coordination body within the Executive Office of the President responsible for directing and overseeing issues related to achieving a reliable global information and communications infrastructure. Also in 2009, DHS issued an updated version of its National Infrastructure Protection Plan (NIPP). The NIPP is intended to provide the framework for a coordinated national approach to addressing the full range of physical, cyber, and human threats and vulnerabilities that pose risks to the nation's critical infrastructures. The NIPP relies on a sector partnership model as the primary means of coordinating government and private-sector critical infrastructure protection efforts. Under this model, each sector has both a government council and a private sector council to address sector-specific planning and coordination. The government and private-sector councils are to work in tandem to create the context, framework, and support for the coordination and information-sharing activities required to implement and sustain each sector's infrastructure protection efforts. The council framework allows for the involvement of representatives from all levels of government and the private sector, to facilitate collaboration and information-sharing in order to assess events accurately, formulate risk assessments, and determine appropriate protective measures. The establishment of private-sector councils is encouraged under the NIPP model, and these councils are to be the principal entities for coordinating with the government on a wide range of CIP activities and issues. Using the NIPP partnership model, the private and public sectors coordinate to manage the risks related to cyber CIP by, among other things, sharing information, providing resources, and conducting exercises. In October 2009, DHS established its National Cybersecurity and Communications Integration Center (NCCIC) to coordinate national response efforts and work directly with federal, state, local, tribal, and territorial governments and private-sector partners. The NCCIC integrates the functions of the National Cyber Security Center, US-CERT, the National Coordinating Center for Telecommunications, and the Industrial Control Systems CERT into a single coordination and integration center and co-locates other essential public and private sector cybersecurity partners. In September 2010, DHS issued an interim version of its national cyber incident response plan. The purpose of the plan is to establish the strategic framework for organizational roles, responsibilities, and actions to prepare for, respond to, and begin to coordinate recovery from a cyber incident. It aims to tie various policies and doctrine together into a single tailored, strategic, cyber-specific plan designed to assist with operational execution, planning, and preparedness activities and to guide short-term recovery efforts. DHS has also coordinated several cyber attack simulation exercises to strengthen public and private incident response capabilities. In September 2010, DHS conducted the third of its Cyber Storm exercises, which are large-scale simulations of multiple concurrent cyber attacks. (DHS previously conducted Cyber Storm exercises in 2006 and 2008.) The third Cyber Storm exercise was undertaken to test the National Cyber Incident Response Plan, and its participants included representatives from federal departments and agencies, states, ISACs, foreign countries, and the private sector. Despite the actions taken by several successive administrations and the executive branch agencies, significant challenges remain to enhancing the protection of cyber-reliant critical infrastructures. Implementing actions recommended by the president's cybersecurity policy review. In October 2010, we reported that of the 24 near- and mid-term recommendations made by the presidentially initiated policy review to improve the current U.S. approach to cybersecurity, only 2 had been implemented and 22 were partially implemented. Officials from key agencies involved in these efforts (e.g., DHS, the Department of Defense, and the Office of Management and Budget) stated that progress had been slower than expected because agencies lacked assigned roles and responsibilities and because several of the mid-term recommendations would require action over multiple years. We recommended that the national Cybersecurity Coordinator designate roles and responsibilities for each recommendation and develop milestones and plans, including measures, to show agencies' progress and performance. Updating the national strategy for securing the information and communications infrastructure. In March 2009, we testified on the needed improvements to the nation's cybersecurity strategy. In preparation for that testimony, we convened a panel of experts that included former federal officials, academics, and private-sector executives. The panel highlighted 12 key improvements that, in its view, were essential to improving the strategy and our national cybersecurity postures, including (1) the development of a national strategy that clearly articulates objectives, goals, and priorities; (2) focusing more actions on prioritizing assets and functions, assessing vulnerabilities, and reducing vulnerabilities than on developing plans; and (3) bolstering public-private partnerships though an improved value proposition and use of incentives. Reassessing the cyber sector-specific planning approach to critical infrastructure protection. In September 2009, we reported that, among other things, sector-specific agencies had yet to update their respective sector-specific plans to fully address key DHS cyber security criteria. In addition, most agencies had not updated the actions and reported progress in implementing them as called for by DHS guidance. We noted that these shortfalls were evidence that the sector planning process has not been effective and thus leaves the nation in the position of not knowing precisely where it stands in securing cyber critical infrastructures. We recommended that DHS (1) assess whether existing sector-specific planning processes should continue to be the nation's approach to securing cyber and other critical infrastructure and consider whether other options would provide more effective results and (2) collaborate with the sectors to develop plans that fully address cyber security requirements. DHS concurred with the recommendations and has taken action to address them. For example, the department reported that it undertook a study in 2009 that determined that the existing sector-specific planning process, in conjunction with other related efforts planned and underway, should continue to be the nation's approach. In addition, at about this time, the department met and worked with sector officials to update sector plans with the goal of fully addressing cyber-related requirements. Strengthening the public-private partnerships for securing cyber- critical infrastructure. The expectations of private sector stakeholders are not being met by their federal partners in areas related to sharing information about cyber-based threats to critical infrastructure. In July 2010, we reported that federal partners, such as DHS, were taking steps that may address the key expectations of the private sector, including developing new information-sharing arrangements. We also reported that public sector stakeholders believed that improvements could be made to the partnership, including improving private sector sharing of sensitive information. We recommended, among other things, that the national Cybersecurity Coordinator and DHS work with their federal and private-sector partners to enhance information-sharing efforts, including leveraging a central focal point for sharing information among the private sector, civilian government, law enforcement, the military, and the intelligence community. DHS concurred with this recommendation and officials stated that they have made progress in addressing the recommendation. We will be determining the extent of that progress as part of our audit follow-up efforts. Enhancing cyber analysis and warning capabilities. DHS's US-CERT has not fully addressed 15 key attributes of cyber analysis and warning capabilities that we identified. As a result, we recommended in July 2008 that the department address shortfalls associated with the 15 attributes in order to fully establish a national cyber analysis and warning capability as envisioned in the national strategy. DHS agreed in large part with our recommendations and has reported that it is taking steps to implement them. We are currently working with DHS officials to determine the status of their efforts to address these recommendations. Addressing global cybersecurity and governance. Based on our review, the U.S. government faces a number of challenges in formulating and implementing a coherent approach to global aspects of cyberspace, including, among other things, providing top-level leadership, developing a comprehensive strategy, and ensuring cyberspace-related technical standards and policies do not pose unnecessary barriers to U.S. trade. Specifically, we determined that the national Cybersecurity Coordinator's authority and capacity to effectively coordinate and forge a coherent national approach to cybersecurity were still under development. In addition, the U.S. government had not documented a clear vision of how the international efforts of federal entities, taken together, support overarching national goals. Further, we learned that some countries had attempted to mandate compliance with their indigenously developed cybersecurity standards in a manner that risked discriminating against U.S. companies. We recommended that, among other things, the Cybersecurity Coordinator develop with other relevant entities a comprehensive U.S. global cyberspace strategy that, among other things, addresses technical standards and policies while taking into consideration U.S. trade. In May 2011, the White House released the International Strategy for Cyberspace: Prosperity, Security, and Openness in a Networked World. We will be determining the extent that this strategy addresses our recommendation as part of our audit follow-up efforts. Securing the modernized electricity grid. In January 2011, we reported on progress and challenges in developing, adopting, and monitoring cybersecurity guidelines for the modernized, IT-reliant electricity grid (referred to as the "smart grid"). Among other things, we identified six key challenges to securing smart grid systems. These included, among others, a lack of security features being built into certain smart grid a lack of an effective mechanism for sharing information on cybersecurity within the electric industry, and a lack of electricity industry metrics for evaluating cybersecurity. We also reported that the Department of Commerce's National Institute for Standards and Technology (NIST) had developed and issued a first version of its smart grid cybersecurity guidelines. While NIST largely addressed key cybersecurity elements that it had planned to include in the guidelines, it did not address an important element essential to securing smart grid systems that it had planned to include--addressing the risk of attacks that use both cyber and physical means. NIST officials said that they intend to update the guidelines to address the missing elements, and have drafted a plan to do so. While a positive step, the plan and schedule were still in draft form. We recommended that NIST finalize its plan and schedule for updating its cybersecurity guidelines to incorporate missing elements; NIST agreed with this recommendation. In addition to the challenges we have previously identified, we have ongoing work in two key areas related to the protection of cyber critical infrastructures. The first is to identify the extent to which cybersecurity guidance has been specified within selected critical infrastructure sectors and to identify areas of commonality and difference between sector- specific guidance and guidance applicable to federal agencies. The second is a study of risks associated with the supply chains used by federal agencies to procure IT equipment, software, or services, along with the extent to which national security-related agencies are taking risk- based approaches to supply-chain management. We plan to issue the results of this work in November 2011 and early 2012, respectively. In summary, the threats to information systems are evolving and growing, and systems supporting our nation's critical infrastructure are not sufficiently protected to consistently thwart the threats. While actions have been taken, the administration and executive branch agencies need to address the challenges in this area to improve our nation's cybersecurity posture, including enhancing cyber analysis and warning capabilities and strengthening the public-private partnerships for securing cyber-critical infrastructure. Until these actions are taken, our nation's cyber critical infrastructure will remain vulnerable. Mr. Chairman, this completes my statement. I would be happy to answer any questions you or other members of the Subcommittee have at this time. If you have any questions regarding this statement, please contact Gregory C. Wilshusen at (202) 512-6244 or [email protected]. Other key contributors to this statement include Michael Gilmore (Assistant Director), Bradley Becker, Kami Corbett, and Lee McCracken. Cybersecurity: Continued Attention Needed to Protect Our Nation's Critical Infrastructure and Federal Information Systems. GAO-11-463T. Washington, D.C.: March 16, 2011. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 2011. Electricity Grid Modernization: Progress Being Made on Cybersecurity Guidelines, but Key Challenges Remain to be Addressed. GAO-11-117. Washington, D.C.: January 12, 2011. Information Security: Federal Agencies Have Taken Steps to Secure Wireless Networks, but Further Actions Can Mitigate Risk. GAO-11-43. Washington, D.C.: November 30, 2010. Cyberspace Policy: Executive Branch Is Making Progress Implementing 2009 Policy Review Recommendations, but Sustained Leadership Is Needed. GAO-11-24. Washington, D.C.: October 6, 2010. Information Security: Progress Made on Harmonizing Policies and Guidance for National Security and Non-National Security Systems. GAO-10-916. Washington, D.C.: September 15, 2010. Information Management: Challenges in Federal Agencies' Use of Web 2.0 Technologies. GAO-10-872T. Washington, D.C.: July 22, 2010. Critical Infrastructure Protection: Key Private and Public Cyber Expectations Need to Be Consistently Addressed. GAO-10-628. Washington, D.C.: July 15, 2010. Cyberspace: United States Faces Challenges in Addressing Global Cybersecurity and Governance. GAO-10-606. Washington, D.C.: July 2, 2010. Cybersecurity: Continued Attention Is Needed to Protect Federal Information Systems from Evolving Threats. GAO-10-834T. Washington, D.C.: June 16, 2010. Cybersecurity: Key Challenges Need to Be Addressed to Improve Research and Development. GAO-10-466. Washington, D.C.: June 3, 2010. Information Security: Federal Guidance Needed to Address Control Issues with Implementing Cloud Computing. GAO-10-513. Washington, D.C.: May 27, 2010. Cybersecurity: Progress Made but Challenges Remain in Defining and Coordinating the Comprehensive National Initiative. GAO-10-338. Washington, D.C.: March 5, 2010. Critical Infrastructure Protection: DHS Needs to Fully Address Lessons Learned from Its First Cyber Storm Exercise. GAO-08-825. Washington, D.C.: September 9, 2008. Information Security: TVA Needs to Address Weaknesses in Control Systems and Networks. GAO-08-526. Washington, D.C.: May 21, 2008. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Increasing computer interconnectivity, such as the growth of the Internet, has revolutionized the way our government, our nation, and much of the world communicate and conduct business. However, this widespread interconnectivity poses significant risks to the government's and the nation's computer systems, and to the critical infrastructures they support. These critical infrastructures include systems and assets--both physical and virtual--that are essential to the nation's security, economic prosperity, and public health, such as financial institutions, telecommunications networks, and energy production and transmission facilities. Because most of these infrastructures are owned by the private sector, establishing effective public-private partnerships is essential to securing them from pervasive cyber-based threats. Federal law and policy call for federal entities, such as the Department of Homeland Security (DHS), to work with private-sector partners to enhance the physical and cyber security of these critical infrastructures. GAO is providing a statement describing (1) cyber threats facing cyber-reliant critical infrastructures; (2) recent actions the federal government has taken, in partnership with the private sector, to identify and protect cyber-reliant critical infrastructures; and (3) ongoing challenges to protecting these infrastructures. In preparing this statement, GAO relied on its previously published work in the area. The threats to systems supporting critical infrastructures are evolving and growing. In a February 2011 testimony, the Director of National Intelligence noted that there has been a dramatic increase in cyber activity targeting U.S. computers and systems in the last year, including a more than tripling of the volume of malicious software since 2009. Varying types of threats from numerous sources can adversely affect computers, software, networks, organizations, entire industries, or the Internet itself. These include both unintentional and intentional threats, and may come in the form of targeted or untargeted attacks from criminal groups, hackers, disgruntled employees, hostile nations, or terrorists. The interconnectivity between information systems, the Internet, and other infrastructures can amplify the impact of these threats, potentially affecting the operations of critical infrastructure, the security of sensitive information, and the flow of commerce. Recent reported incidents include hackers accessing the personal information of hundreds of thousands of customers of a major U.S. bank and a sophisticated computer attack targeting control systems used to operate industrial processes in the energy, nuclear, and other critical sectors. Over the past 2 years, the federal government, in partnership with the private sector, has taken a number of steps to address threats to cyber critical infrastructure. In early 2009, the White House conducted a review of the nation's cyberspace policy that addressed the missions and activities associated with the nation's information and communications infrastructure. The results of the review led, among other things, to the appointment of a national Cybersecurity Coordinator with responsibility for coordinating the nation's cybersecurity policies and activities. Also in 2009, DHS updated its National Infrastructure Protection Plan, which provides a framework for addressing threats to critical infrastructures and relies on a public-private partnership model for carrying out these efforts. DHS has also established a communications center to coordinate national response efforts to cyber attacks and work directly with other levels of government and the private sector and has conducted several cyber attack simulation exercises. Despite recent actions taken, a number of significant challenges remain to enhancing the security of cyber-reliant critical infrastructures, such as (1) implementing actions recommended by the president's cybersecurity policy review; (2) updating the national strategy for securing the information and communications infrastructure; (3) reassessing DHS's planning approach to critical infrastructure protection; (4) strengthening public-private partnerships, particularly for information sharing; (5) enhancing the national capability for cyber warning and analysis; (6) addressing global aspects of cybersecurity and governance; and (7)securing the modernized electricity grid, referred to as the "smart grid." In prior reports, GAO has made many recommendations to address these challenges. GAO also continues to identify protecting the nation's cyber critical infrastructure as a governmentwide high-risk area.
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Most of HUD's housing assistance payments were timely--HUD disbursed by the due date 75 percent of the 3.2 million monthly payments for fiscal years 1995 through 2004. However, 25 percent of its payments were late, and 8 percent (averaging about 25,000 payments per year) were significantly late--that is, they were delayed by 2 weeks or more, a time frame in which some owners indicated the late payment could affect their ability to pay their mortgages on time. HUD made payments on an average of about 26,000 contracts per month. About one-third of these contracts experienced at least one payment per year that was late by 2 weeks or more. The timeliness of HUD's monthly housing assistance payments varied over the 10-year period, decreasing in 1998 shortly after HUD began implementing the Multifamily Assisted Housing Reform and Affordability Act of 1997, which contained new contract renewal and processing requirements. Timeliness gradually improved after 2001, after HUD began using performance-based contract administrators to administer a majority of the contracts. In the 3-year period of fiscal years 2002 through 2004, HUD disbursed 79 percent of payments by the due date, but 7 percent of these payments were significantly late. The primary factors affecting the timeliness of HUD's housing assistance payments were the process of renewing owners' contracts; internal HUD processes for funding contracts and monitoring how quickly each contract uses its funding; and untimely, inaccurate, or incomplete submissions of monthly vouchers by project owners. More specifically: Monthly housing assistance payments were more likely to be late when owners' contracts to participate in HUD's programs were not renewed by their expiration dates. For example, our analysis of available HUD data on the reasons that payments were 2 weeks or more late from fiscal years 2002 through 2004 found that the most common reason was the payment being withheld pending contract renewal. HUD officials and contract administrators said that delays on HUD's part--stemming from a renewal process HUD officials agreed could be cumbersome and paper intensive--could cause (or exacerbate) late payments that resulted from the lack of a renewed contract. The timeliness, quality, and completeness of owners' renewal submissions also could cause delays in contract renewals, particularly when an owner's initial contract expired and it had to be renewed for the first time. HUD did not know exactly how much it would pay owners each year because the amounts varied with tenant turnover, so HUD estimated how much funding it would need to obligate, or commit, to each contract and how quickly the contract would use these funds. However, HUD often underestimated how much funding a contract would need in a given year, and the agency lacked consistent processes for field office staff to monitor contracts and allocate and obligate additional funds when contracts used funds faster than anticipated. Failure to allocate and obligate additional funds to contracts promptly could cause payments to be late. According to HUD officials and contract administrators, owners' untimely, inaccurate, or incomplete monthly voucher submissions also might cause late housing assistance payments. However, the contract administrators with whom we spoke generally indicated they were able to correct errors in owners' submissions ahead of time to ensure timely payments. According to project owners with whom we met, delays in HUD's housing assistance payments had negative financial effects and may have compromised owners' ability to operate their properties, but the delays were unlikely to cause owners to opt out of HUD's programs or stop providing affordable housing. Some owners said they incurred late fees on their mortgages and other bills or experienced interruptions in services at their properties because of delayed payments. Effects of delayed payments could vary in severity, depending on the financial condition of the property owner and the extent to which the operation of the property was dependent on HUD's subsidy. Further, owners said that HUD did not notify them of when or for how long payments would be delayed, which prevented them from taking steps to mitigate the effects of late payments. The owners and industry group officials generally agreed that the negative effects of delayed payments alone would not cause owners to opt out of HUD's programs, although they could be a contributing factor. We made several recommendations to HUD designed to improve the timeliness of these subsidy payments, with which the agency concurred. My statement incorporates information on the status of HUD's actions in response to these recommendations. HUD operates a variety of project-based rental assistance programs through which it pays subsidies, or housing assistance payments, to private owners of multifamily housing that help make this housing affordable for lower-income households. HUD entered into long-term contracts, often 20 to 40 years, committing it and the property owners to providing long-term affordable housing. Under these contracts, tenants generally pay 30 percent of their adjusted income toward their rents, with the HUD subsidy equal to the difference between what the tenants pay and the contract rents that HUD and the owners negotiate in advance. In the mid- to late-1990s, Congress and HUD made several important changes to the duration of housing assistance contract terms (and the budgeting for them), the contract rents owners would receive relative to local market conditions, and the manner in which HUD administers its ongoing project-based housing assistance contracts. Specifically: Because of budgetary constraints, HUD shortened the terms of subsequent renewals, after the initial 20- to 40-year terms began expiring in the mid-1990s. HUD reduced the contract terms to 1 or 5 years, with the funding renewed annually subject to appropriations. Second, in 1997, Congress passed the Multifamily Assisted Housing Reform and Affordability Act (MAHRA), as amended, in an effort to ensure that the rents HUD subsidizes remained comparable with market rents. Over the course of the initial longer-term agreements with owners, contract rents in some cases came to substantially exceed local market rents. MAHRA required an assessment of each project when it neared the end of its original contract term to determine whether the contract rents were comparable to current market rents and whether the project had sufficient cash flow to meet its debt as well as daily and long-term operating expenses. If the expiring contract rents were below market rates, HUD could increase the contract rents to market rates upon renewal (i.e., "mark up to market"). Conversely, HUD could decrease the contract rents upon renewal if they were higher than market rents (i.e., "mark down to market"). Finally, in 1999, because of staffing constraints (primarily in HUD's field offices) and the workload involved in renewing the increasing numbers of rental assistance contracts reaching the end of their initial terms, HUD began an initiative to contract out the oversight and administration of most of its project-based contracts. The entities that HUD hired--typically public housing authorities or state housing finance agencies--are responsible for conducting on-site management reviews of assisted properties; adjusting contract rents; reviewing, processing, and paying monthly vouchers submitted by owners; renewing contracts with property owners; and responding to health and safety issues at the properties. As of fiscal year 2004, these performance-based contract administrators (PBCA) administered the majority of contracts--more than 13,000 of approximately 23,000 contracts. HUD also has two other types of contract administrators. "Traditional" contract administrators (typically local public housing authorities) were responsible for administering approximately 5,000 contracts until they expired; at which time, these contracts would be assigned to the PBCAs. Finally, HUD itself also administered a small number of contracts under specific types of project-based programs. To receive their monthly housing assistance payments, owners must submit monthly vouchers to account for changes in occupancy and tenants' incomes that affect the actual amount of subsidy due. However, the manner in which the owners submit these vouchers and the process by which they get paid varies depending on which of the three types of contract administrators handles their contract. For HUD-administered contracts, the owner submits a monthly voucher to HUD for verification, and HUD in turn pays the owner based on the amount in the voucher. For PBCA-administered contracts, the owner submits a monthly voucher to the PBCA, which verifies the voucher and forwards it to HUD for payment. HUD then transfers the amount verified on the voucher to the PBCA, which in turn pays the owner. In contrast, for traditionally administered contracts, HUD and the contract administrator develop a yearly budget, and HUD pays the contract administrator set monthly payments. The owner submits monthly vouchers to the contract administrator for verification, and the contract administrator pays the amount approved on the voucher. At the end of the year, HUD and the contract administrator reconcile the payments HUD made to the contract administrator with the amounts the contract administrator paid to the owner, exchanging payment as necessary to settle any difference. Overall, from fiscal years 1995 through 2004, HUD disbursed by the due date 75 percent of the 3.2 million monthly housing assistance payments on all types of contracts (see fig. 1). However, 8 percent of payments, averaging 25,000 per year, were significantly late--that is, they were delayed by 2 weeks or more and therefore could have had negative effects on owners who relied on HUD's subsidy to pay their mortgages. During this period, 6 percent of the total payments (averaging 18,000 per year) were 4 weeks or more late, including about 10,000 payments per year that were 8 weeks or more late. HUD does not have an overall timeliness standard, by which it makes payments to owners or its contract administrators, that is based in statute, regulation, or HUD guidance. However, HUD contractually requires the PBCAs (which administer the majority of contracts) to pay owners no later than the first business day of the month. HUD officials said that they also used this standard informally to determine the timeliness of payments on HUD-administered and traditionally administered contracts. Therefore, we considered payments to be timely if they were disbursed by the first business day of the month. Based on our discussions with project owners who reported that they relied on HUD's assistance to pay their mortgages before they incurred late fees (generally, after the 15th day of the month), we determined that a payment delay of 2 weeks or more was significant. The timeliness of housing assistance payments varied over the 10-year period (see fig. 2). The percentage of payments that were significantly late increased in 1998, which HUD and PBCA officials indicated likely had to do with HUD's initial implementation of MAHRA and new contract renewal procedures and processing requirements for project owners. Timeliness gradually improved after 2001, shortly after HUD first began using the PBCAs to administer contracts. The percentage of contracts experiencing at least one significantly late payment over the course of the year showed a similar variation over the 10-year period, rising to 43 percent in fiscal year 1998 and decreasing to 30 percent in fiscal year 2004 (see fig. 3). As with the percentage of late payments, the percentage of contracts with late payments increased in fiscal year 1998 when HUD implemented requirements pursuant to MAHRA. Over the 10-year period, about one-third of approximately 26,000 contracts experienced at least one payment per year that was delayed by 2 weeks or more. Payments on HUD-administered contracts were more likely to be delayed than those on contracts administered by the PBCAs and traditional contract administrators, based on HUD's fiscal year 2004 payment data (see fig. 4). Further, HUD-administered contracts were more likely to have chronically late payments. In fiscal year 2004, 9 percent of HUD- administered contracts experienced chronic late payments, while 3 percent of PBCA-administered contracts and 1 percent of the traditionally administered contracts had chronic late payments. Late monthly voucher payments were more likely to occur when a contract had not been renewed by its expiration date, according to many of the HUD officials, contract administrators, and property owners with whom we spoke. HUD's accounting systems require that an active contract be in place with funding obligated to it before it can release payments for that contract. Therefore, an owner cannot receive a monthly voucher payment on a contract that HUD has not renewed. Our analysis of HUD data from fiscal years 2002 through 2004 showed that 60 percent of the payments that were 2 weeks or more late was associated with pending contract renewals, among late payments on PBCA-and HUD- administered contracts for which HUD recorded the reason for the delay (see fig. 5). A contract renewal might be "pending" when one or more parties involved in the process--HUD, the PBCA, or the owner--had not completed the necessary steps to finalize the renewal. Based on our interviews with HUD officials, contract administrators, and owners, pending contract renewals might result from owners' failing to submit their renewal packages on time. Often the delay occurred when owners had to submit a study of market rents, completed by a certified appraiser, to determine the market rent levels. However, late payments associated with contract renewals also might occur because HUD had not completed its required processing. For example, according to a HUD official, at one field office we visited, contract renewals were delayed because HUD field staff were behind in updating necessary information, such as the new rent schedules associated with the renewals and the contract execution dates in HUD payment systems. HUD's contract renewal process was largely manual and paper driven and required multiple staff in the PBCAs and HUD to complete (see fig. 6). Upon receipt of renewal packages from owners, the PBCAs then prepared and forwarded signed contracts (in hard copy) to HUD field offices, which executed the contracts; in turn, the field offices sent hard copies of contracts to a HUD accounting center, which activated contract funding. To allow sufficient time to complete the necessary processing, HUD's policy required owners to submit a renewal package to their PBCAs 120 days before a contract expires, and gives the PBCAs 30 days to forward the renewal package to HUD for completion (leaving HUD 90 days for processing). However, some owners told us that their contract renewals had not been completed by the contract expiration dates, even though they had submitted their renewal packages on time. While initial contract renewals (upon expiration of the owner's initial long- term contract) often exceeded the 120-day processing time, subsequent renewals were less time-consuming and resulted in fewer delays, according to HUD officials, the PBCAs, and owners. Initial renewals could be challenging for owners because they often involved HUD's reassessment of whether the contract rents were in line with market rents. Additionally, the initial renewal represented the first time that owners had to provide HUD with the extensive documentation required for contract renewals to continue receiving housing assistance payments. Further, in preparing our 2007 report, some property owners we contacted raised concerns about the renewal process, particularly on the clarity of the HUD policies and procedures and the way the policies were applied. Specifically, these owners were concerned that the contract renewal guide that was published in 1999 had not been updated despite many changes to HUD's policies and procedures, which has led to confusion among some owners. To improve the timeliness of housing assistance payments, we recommended in our 2005 report that HUD streamline and automate the contract renewal process to prevent processing errors and delays and eliminate paper/hard-copy requirements to the extent practicable. In its response, HUD agreed with our recommendation and commented that streamlining and automating the renewal process would be accomplished through its Business Process Reengineering (BPR) effort. As we noted in our 2005 report, HUD launched this initiative in 2004 to develop plans to improve what it characterized as "inefficient or redundant processes" and integrate data systems. However, according to HUD, the agency has not received funding sufficient to implement the BPR initiative. As a result, HUD has been pursuing other solutions aimed at streamlining and simplifying the contract renewal process. According to HUD, the agency is planning to implement a Web-based contract renewal process that would be paperless, which it expects to complete in fiscal year 2010. HUD also told us that although it does not have funding in place to fully develop this automated renewal process, it has been implementing this new process in phases, as funding becomes available. The methods HUD used to estimate the amount of funds needed for the term of each of its project-based assistance contracts and the way it monitored the funding levels on those contracts also affected the timeliness of housing assistance payments. When HUD renews a contract, and when it obligates additional funding for each year of contracts with 5- year terms, it obligates an estimate of the actual subsidy payments to which the owner will be entitled over the course of a year. However, those estimates were often too low, according to HUD headquarters and field office officials and contract administrators. For example, an underestimate of rent increases or utility costs or a change in household demographics or incomes at a property would affect the rate at which a contract exhausted its funds, potentially causing the contract to need additional funds obligated to it before the end of the year. If HUD underestimated the subsidy payments, the department needed to allocate more funds to the contract and adjust its obligation upwards to make all of the monthly payments. Throughout the year, HUD headquarters used a "burn-rate calculation" to monitor the rate at which a contract exhausted or "burned" the obligated funds and identify those contracts that may have had too little (or too much) funding. According to some HUD field office and PBCA officials, they also proactively monitored contract fund levels. Based on the rate at which a contract exhausted its funds, HUD obligated more funds if needed. However, based on our analysis of available HUD data and our discussions with HUD field office officials, owners, and contract administrators, payments on some contracts were still delayed because they needed to have additional funds allocated and obligated before a payment could be made. As shown in figure 5, our analysis of HUD's payment data showed that, where the reasons for delayed payments on PBCA-and HUD- administered contracts were available, 11 percent of delays of 2 weeks or more were due to contracts needing additional funds obligated. That is, those payments were delayed because, at the time the owners' vouchers were processed, HUD had not allocated and obligated enough funding to the contracts to cover the payments. One potential factor that likely contributed to payment delays related to obligating contract funding was staff at some HUD field offices--unlike their counterparts in other field offices and staff at some of the PBCAs-- lacking access to data systems or not being trained to use them to monitor funding levels. At some of the field offices we visited, officials reported that they did not have access to the HUD data systems that would allow them to adequately monitor contract funding levels. HUD field offices reported, and headquarters confirmed, that some field officials had not received training to carry out some functions critical to monitoring the burn rate. A HUD headquarters official reported that changes in the agency's workforce demographics posed challenges because not all of the field offices had staff with an optimal mix of skill and experience. We recommended in our 2005 report that HUD develop systematic means to better estimate the amounts that should be allocated and obligated to project-based housing assistance payment contracts each year, monitor the ongoing funding needs of each contract, and ensure that additional funds were promptly obligated to contracts when necessary to prevent payment delays. HUD agreed that this recommendation would improve the timeliness of payments, noting that it planned on achieving improvements through training, data quality reviews, and data systems maintenance. To determine how best to improve the current estimation/allocation system, HUD stated that it had obtained a contractor to analyze current data systems and make recommendations on improvements that would allow better identification of emerging funding requirements as well as improved allocation of available resources. As of October 2007, HUD reported that it was in the process of verifying and correcting data critical to renewing project-based rental assistance contracts in its data systems to produce a "clean universe of contracts." Based on its preliminary results, HUD officials told us that the data appeared to be reasonably accurate for the purposes of estimating renewal funding amounts. In addition, HUD has evaluated the current methodology for estimating its budget requirements for the project-based programs and developed a "budget calculator" to estimate renewal funding amounts. HUD has been pursuing contracting services to implement this "calculator" using the recently verified contract data; however, HUD could not provide a specific date by which it expected to complete these improvements. The PBCAs with which we met estimated that 10 to 20 percent of owners submitted late vouchers each month. For example, one PBCA reported that about 20 percent of the payments it processed in 2004 were delayed due to late owner submissions. However, the PBCAs also reported that they generally could process vouchers in less than the allowable time--20 days--agreed to in their contracts with HUD and resolve any errors with owners to prevent a payment delay. According to PBCA officials, they often participated in several "back-and-forth" interactions with owners to resolve errors or inaccuracies. Typical owner submission errors included failing to account correctly for changes in the number of tenants or tenant income levels, or failing to provide required documentation. Because HUD's data systems did not capture the back-and-forth interactions PBCA officials described to us, we could not directly measure the extent to which owners' original voucher submissions may have been late, inaccurate, or incomplete. HUD officials and the PBCAs reported that owners had a learning curve when contracts were transferred to the PBCAs because the PBCAs reviewed monthly voucher submissions with greater scrutiny than HUD had in the past. The timeliness of payments also might be affected by a PBCA's internal policies for addressing owner errors. For example, to prevent payment delays, some of the PBCA officials with whom we spoke told us that they often processed vouchers in advance of receiving complete information on the owners' vouchers. In contrast, at one of the PBCAs we visited, officials told us that they would not process an owner's voucher for payment unless it fully met all of HUD's requirements. In preparing our 2005 report, some owners reported that they had not been able to pay their mortgages or other bills on time as a result of HUD's payment delays. Three of the 16 owners with whom we spoke reported having to pay their mortgages or other bills late as a result of HUD's payment delays. One owner reported that he was in danger of defaulting on one of his properties as a direct result of late housing assistance payments. Another owner was unable to provide full payments to vendors (including utilities, telephone service, plumbers, landscapers, and pest control services) during a 3-month delay in receiving housing assistance payments. According to this owner, her telephone service was interrupted during the delay and her relationship with some of her vendors suffered. This owner also expressed concern about how the late and partial payments to vendors would affect her credit rating. If owners were unable to pay their vendors or their staff, services to the property and the condition of the property could suffer. At one affordable housing property for seniors that we visited, the utility services had been interrupted because of the owner's inability to make the payments. At the same property, the owner told us that she could not purchase cleaning supplies and had to borrow supplies from another property. One of the 16 owners with whom we spoke told us that they were getting ready to furlough staff during the time that they were not receiving payments from HUD. According to one HUD field office official, owners have complained about not being able to pay for needed repairs or garbage removal while they were waiting to receive a housing assistance payment. According to one industry group official, payment delays could result in the gradual decline of the condition of the properties in instances where owners were unable to pay for needed repairs. According to owners as well as industry group and HUD officials, owners who were heavily reliant on HUD's subsidy to operate their properties were more severely affected by payment delays than other owners. Particularly, owners who owned only one or a few properties and whose operations were completely or heavily reliant on HUD's subsidies had the most difficulty weathering a delay. For example: Two of the 16 owners with whom we spoke reported that they could not pay their bills and operate the properties during a payment delay. These owners were nonprofits, each operating a single property occupied by low-income seniors. In both cases, the amount of rent they were receiving from the residents was insufficient to pay the mortgage and other bills. Neither of these owners had additional sources of revenue. In contrast, owners with several properties and other sources of revenue were less severely affected by HUD's payment delays. Three of the owners with whom we spoke reported that they were able to borrow funds from their other properties or find other funding sources to cover the mortgage payments and other bills. All three of these owners had a mix of affordable and market-rate properties. According to HUD and PBCA officials, owners who receive a mix of subsidized and market rate rents from their properties would not be as severely affected by a payment delay as owners with all subsidized units. While HUD's payment delays had negative financial effects on project owners, the delays appeared unlikely to result in owners opting out of HUD's programs. Project owners, industry group officials, contract administrators, and HUD officials we interviewed generally agreed that market factors, not late payments, primarily drove an owner's decision to opt out of HUD programs. Owners generally opt out when they can receive higher market rents or when it is financially advantageous to convert their properties to condominiums. For profit-motivated owners, this decision can be influenced by the condition of the property and the income levels of the surrounding neighborhood. Owners were more likely to opt out if they could upgrade their properties at a reasonable cost to convert them to condominiums or rental units for higher-income tenants. In preparing our 2007 report, we also found that although the majority of the owners who opted out of the program did so for economic or market factors, growing owner frustration over a variety of administrative issues, including late payments, could upset the balance causing more owners to consider opting out even when economic conditions could be overcome or mitigated. However, most of the owners with whom we spoke, including some profit-motivated owners, reported that they would not opt out of HUD programs because of their commitment to providing affordable housing. Industry group officials also stated that most of their members were "mission driven," or committed to providing affordable housing. HUD had no system for notifying owners when a payment delay would occur or when it would be resolved, which industry associations representing many owners as well as the owners with whom we met indicated impeded their ability to adequately plan to cover expenses until receiving the late payment. Most of the owners with whom we spoke reported that they received no warning from HUD that their payments would be delayed. Several of the owners told us that notification of the delay and the length of the delay would give them the ability to decide how to mitigate the effects of a late payment. For example, owners could then immediately request access to reserve accounts if the delay were long enough to prevent them from paying their mortgages or other bills on time. Industry group officials with whom we met agreed that a notification of a delayed payment would benefit their members. To mitigate the effects on owners when payments were delayed, we recommended in our 2005 report that HUD notify owners if their monthly housing assistance payments would be late and include in such notifications the date by which HUD expected to make the monthly payment to the owner. HUD agreed with the recommendation and noted it would examine the feasibility of notifying project owners if HUD anticipated that there would be a significant delay in payment due to an issue beyond the control of the owner. Based on discussions with HUD, the agency does not appear to have made significant progress in implementing this recommendation. HUD stated that it had begun notifying owners regarding the amount of funding available under their contracts, which would allow owners to judge when their contracts are likely to experience shortfalls (and thus possibly experience late payments). However, the notification would not warn owners that their payments would be delayed or advise them on the length of the delay. Without this information, it would be difficult for owners to plan for such a contingency. Madam Chairwoman, this concludes my prepared statement. I would be happy to answer any questions at this time. For further information on this testimony, please contact David G. Wood at (202) 512-8678 or [email protected]. Individuals making key contributions to this testimony included Andy Finkel, Daniel Garcia-Diaz, Grace Haskins, Roberto Pinero, Linda Rego, and Rose Schuville. 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 Department of Housing and Urban Development (HUD) provides subsidies, known as housing assistance payments, under contracts with privately owned, multifamily projects so that they are affordable to low-income households. Project owners have expressed concern that HUD has chronically made late housing assistance payments in recent years, potentially compromising owners' ability to pay operating expenses, make mortgage payments, or set aside funds for repairs. This testimony, based primarily on a report issued in 2005, discusses the timeliness of HUD's monthly housing assistance payments, the factors that affected payment timeliness, and the effects of delayed payments on project owners. From fiscal years 1995 through 2004, HUD disbursed three-fourths of its monthly housing assistance payments on time, but thousands of payments were late each year, affecting many property owners. Over the 10-year period, 8 percent of payments were delayed by 2 weeks or more. Payments were somewhat more likely to be timely in more recent years. The process for renewing HUD's subsidy contracts with owners can affect the timeliness of housing assistance payments, according to many owners, HUD officials, and contract administrators that HUD hires to work with owners. HUD's renewal process is largely a manual, hard-copy paper process that requires multiple staff to complete. Problems with this cumbersome, paper-intensive process may delay contract renewals and cause late payments. Also, a lack of systematic internal processes for HUD staff to better estimate the amounts that HUD needed to obligate to contracts each year and monitor contract funding levels on an ongoing basis can contribute to delays in housing assistance payments. Although HUD allows owners to borrow from reserve accounts to lessen the effect of delayed housing assistance payments, 3 of 16 project owners told GAO that they had to make late payments on their mortgages or other bills--such as utilities, telephone service, or pest control--as a result of HUD's payment delays. Owners who are heavily reliant on HUD's subsidy to operate their properties are likely to be more severely affected by payment delays than other, more financially independent, owners. Owners reported receiving no warning from HUD when payments would be delayed, and several told GAO that such notification would allow them to mitigate a delay. Nonetheless, project owners, industry group officials, and HUD officials generally agreed that late housing assistance payments by themselves would be unlikely to cause an owner to leave HUD's housing assistance programs, because such a decision is generally driven primarily by local market factors.
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The military services and defense agencies, such as the National Security Agency and the National Imagery and Mapping Agency, collect and use intelligence data--either in the form of photographic, radar, or infrared images or electronic signals--to better understand and react to an adversary's actions and intentions. This data can come from aircraft like the U-2 or Global Hawk or satellites or other ground, air, sea, or spaced- based equipment. The sensors that collect this data are linked to ground- surface-based processing systems that collect, analyze, and disseminate it to other intelligence processing facilities and to combat forces. (See figures 1 and 2.) These systems can be large or small, fixed, mobile, or transportable. For example, the Air Force operates several large, fixed systems that provide extensive analysis capability well beyond combat activities. By contrast, the Army and Marine Corps operate smaller, mobile intelligence systems that travel with and operate near combat forces. A key problem facing DOD is that these systems do not always work together effectively, thereby slowing down the time it takes to collect data and analyze and disseminate it sometimes by hours or even days, though DOD reports that timing has improved in more recent military operations. At times, some systems cannot easily exchange information because they were not designed to be compatible and must work through technical patches to transmit and receive data. In other cases, the systems are not connected at all. Compounding this problem is the fact that each service has its own command, control, and communications structure that present barriers to interoperability. Among the efforts DOD has underway to improve interoperability is the migration to a family of overarching ground-surface systems, based on the best systems already deployed and future systems. DCGS will not only connect individual systems but also enable these systems to merge intelligence information from multiple sources. The first phase of the migration effort will focus on connecting existing systems belonging to the military services--so that each service has an interoperable "family" of systems. The second phase will focus on interconnecting the families of systems so that joint and combined forces can have an unprecedented, common view of the battlefield. DOD's Office of the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence is leading this effort. Successfully building a compatible ground-surface system is extremely challenging. First, DOD is facing a significant technical challenge. The ground-surface-based systems must not only have compatible electronic connections, but also compatible data transfer rates and data formats and vocabularies. At the same time it modifies systems, DOD must protect sensitive and classified data and be able to make fixes to one system without negatively affecting others. All of these tasks will be difficult to achieve given that the systems currently operated were designed by the individual services with their own requirements in mind and that they still own the systems. Second, sufficient communications capacity (e.g., bandwidth) must exist to transmit large amounts of data. DOD is still in the early stages of adding this capacity through its bandwidth expansion program. Third, DOD must have enough qualified people to analyze and exploit the large volumes of data modern sensors are capable of collecting. Lastly, DOD must still address interoperability barriers that stretch well beyond technical and human capital enhancements. For example, the services may have operating procedures and processes that simply preclude them from sharing data with other services and components, or they may have inconsistent security procedures. Formulating and following common processes and procedures will be difficult since the services have historically been reluctant to do so. Given the multi-billion-dollar commitment and many technical and operational challenges with the migration initiative, it is critical that DOD have effective plans to guide and manage system development. These would include such things as a comprehensive architecture, migration plan, and investment strategy. However, even though it initiated DCGS in 1998 and is fielding new intelligence systems, DOD is still in the beginning stages of this planning. It is now working on an enterprise architecture, a high level concept of operations for the processing of intelligence information, and an overarching test plan, and it expects these to be done by July 2003. DOD has not yet focused on an investment strategy or on a migration plan that would set a target date for completing the migration and outline activities for meeting that date. By fielding systems without completing these plans, DOD is increasing the risk that DCGS systems will not share data as quickly as needed by the warfighter. Successfully moving toward an interoperable family of ground-surface- based processing systems for intelligence data is a difficult endeavor for DOD. The systems now in place are managed by many different entities within DOD. They are involved in a wide range of military operations and installed on a broad array of equipment. At the same time, they need to be made to be compatible and interoperable. DOD's migration must also fit in with long-term goals for achieving information superiority over the enemy. Several elements are particularly critical to successfully addressing these challenges. They include an enterprise architecture, or blueprint, to define the current and target environment for ground-based processing systems; a road map, or migration plan to define how DOD will get to the target environment and track its progress in doing so; and an investment strategy to ensure adequate resources are provided toward the migration. Each of these elements is described in the following discussions. Enterprise architecture. Enterprise architectures systematically and completely define an organization's current (baseline) or desired (target) environment. They do so by providing a clear and comprehensive picture of a mission area--both in logical (e.g., operations, functions, and information flows) terms and technical (e.g., software, hardware, and communications) terms. If defined properly, enterprise architectures can assist in optimizing interdependencies and interrelationships among an organization's operations and the underlying technology supporting these operations. Our experience with federal agencies has shown that attempting to define and build systems without first completing an architecture often results in systems that are duplicative, not well integrated, and unnecessarily costly to maintain and interface, and do not optimize mission performance. DOD also recognizes the importance of enterprise architectures and developed a framework known as the Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR) Architecture Framework for its components to use in guiding efforts similar to DCGS. DOD's acquisition guidance also requires the use of architectures to characterize interrelationships and interactions between U.S., allied, and coalition systems. Migration plan or road map. Given the size and complexity of DCGS, it is important that the migration be planned in convenient, manageable increments to accommodate DOD's capacity to handle change. At a minimum, a plan would lay out current system capabilities, desired capabilities, and specific initiatives, programs, projects, and schedules intended to get DOD and the services to that vision. It would also define measures for tracking progress, such as testing timeliness and the status of modifications, roles and responsibilities for key activities, and mechanisms for enforcing compliance with the migration plan and ensuring that systems conform to technical and data standards defined by the architecture. Such plans, or road maps, are often developed as part of an enterprise architecture. Investment strategy. To ensure the migration is successfully implemented, it is important to know what funds are available--for the initial phases of migration, for interoperability testing, and for transition to the target architecture. It is important as well to know what constraints or gaps need to be addressed. By achieving better visibility over resources, DOD can take steps needed to analyze its migration investment as well as funding alternatives. DOD is in the process of developing an architecture for DCGS. It expects the architecture to be completed by July 2003. As recommended by DOD's C4ISR Architecture Framework, the architecture will include a (1) baseline, or as-is, architecture and (2) a target, or to-be, architecture. The architecture will also include a high-level concept of operations. The architecture will to also reflect DOD's future plans to develop a web-based intelligence information network. This network would substantially change how intelligence information is collected and analyzed and could therefore substantially change DOD's requirements for DCGS. Currently, ground-surface-based systems process intelligence data and then disseminate processed data to select users. Under the new approach, unprocessed data would be posted on a Web-based network; leaving a larger range of users to decide which data they want to process and use. DOD has started implementing its plans for this new network but does not envision fully implementing it until 2010-2015. In addition, DOD has created a DCGS Council comprised of integrated product teams to oversee the migration. A team exists for each type of intelligence (imagery, signals, measurement, and signature); test and evaluation; and infrastructure and working groups to study specific issues. In tandem with the architecture, DOD has also issued a capstone requirements document for the migration effort. This document references top-level requirements and standards, such as the Joint Technical Architecture with which all systems must comply. DOD is also developing an overarching test plan called the Capstone Test and Evaluation Master Plan, which will define standards, test processes, test resources, and responsibilities of the services for demonstrating that the systems can work together and an operational concept for processing intelligence information. An enterprise architecture and overarching test plan should help ensure that the ground-surface-based processing systems selected for migration will be interoperable and that they will help to achieve DOD's broader goals for its intelligence operations. But there are gaps in DOD's planning that raise risks that the migration will not be adequately funded and managed. First, the planning process itself has been slower than DOD officials anticipated. By the time DOD expects to complete its architecture and testing plan, it will have been proceeding with its migration initiative for 4 years. This delay has hampered DOD's ability to ensure interoperability in the systems now being developed and deployed. Second, DOD still lacks a detailed migration plan that identifies which systems will be retained for migration; which will be phased out; when systems will be modified and integrated into the target system; how the transition will take place--how efforts will be prioritized; and how progress in implementing the migration plan and architecture will be enforced and tracked. Until DOD puts this in place, it will lack a mechanism to drive its migration. Moreover, the DCGS Council will lack a specific plan and tools for executing its oversight. Third, DOD has not yet developed an integrated investment strategy for its migration effort that would contemplate what resources are available for acquisitions, modifications, and interoperability testing and how gaps in those resources could be addressed. More fundamentally, DOD still lacks visibility over spending on its intelligence systems since spending is spread among the budgets of DOD's services and components. As a result, DOD does not fully know what has already been spent on the migration effort, nor does it have a means for making sure the investments the services make in their intelligence systems support its overall goals; and if not, what other options can be employed to make sure spending is on target. DOD officials agreed that both a migration plan and investment strategy were needed but said they were concentrating first on completing the architecture, test plan, and the operational concept. DOD has a process in place to test and certify that systems are interoperable, but it is not working effectively for ground-surface-based intelligence processing systems. In fact, at the time of our review, only 2 of 26 DCGS systems have been certified as being interoperable. The certification process is important because it considers such things as whether systems can work with systems belonging to other military services without unacceptable workarounds or special interfaces, whether they are using standard data formats, and whether they conform to broader architectures designed to facilitate interoperability across DOD. DOD has placed great importance on making intelligence processing systems interoperable and requires that all new (and many existing) systems demonstrate that they are interoperable with other systems and be certified as interoperable before they are fielded. DOD relies on the Joint Interoperability Test Command (JITC, part of the Defense Information Systems Agency) to certify systems. In conducting this certification, JITC assesses whether systems can interoperate without degrading other systems or networks or being degraded by them; the ability of systems to exchange information; the ability of systems to interoperate in joint environments without the use of unacceptable workaround procedures or special technical interfaces; and the ability of systems to interoperate while maintaining system confidentiality and integrity. In doing so, JITC reviews testing already conducted as well as assessments prepared by independent testing organizations. It may also conduct some of its own testing. The results are then submitted to the Joint Staff, who validate the system's certification. Systems are generally certified for 3 years--after which they must be re-certified. The certification is funded by the system owner--whether it is a service or DOD agency. The cost depends on the size and complexity of a system and generally requires 10 percent of funding designated for testing and evaluation. Generally, certification costs are small relative to the total cost of a system. The cost to certify the Army's $95 million Common Ground Station, for example, was $388,000. To help enforce the certification process, DOD asked 4 key officials (the Under Secretary of Defense for Acquisition, Technology and Logistics; the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence; the Director of Operational Test and Evaluation; and the Director, Joint Staff) in December 2000 to periodically review systems and to place those with interoperability deficiencies on a "watch list." This designation would trigger a series of progress reviews and updates by the program manager, the responsible testing organization, and JITC, until the system is taken off the list. Other DOD forums are also charged with identifying systems that need to be put on the list, including DOD's Interoperability Senior Review Panel, which is composed of senior leaders from the offices of the Under Secretary of Defense for Acquisition Technology and Logistics; the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence; the Joint Staff; the Director for Programs, Analysis, and Evaluation; the Director, Operational Test and Evaluation; and U. S. Joint Forces Command. At the time of our review, only 2 of 26 DCGS systems had been certified by JITC. Of the remaining 24 systems; 3 were in the process of being certified; 14 had plans for certification; and 7 had no plans. (See table 1.) Because 21 systems that have not been certified have already been fielded, there is greater risk that the systems cannot share data as quickly as needed. Some of the systems in this category are critical to the success of other intelligence systems. For example, software modules contained in the Army's tactical exploitation system are to be used to build systems for the Navy, Marine Corps, and the Air Force. DOD officials responsible for developing intelligence systems as well as testing them pointed toward several reasons for noncompliance, including the following. Our previous work in this area has identified the following similar reasons. Some system managers are unaware of the requirement for certification. Some system managers do not believe that their design, although fielded, was mature enough for testing. Some system managers are concerned that the certification process itself would raise the need for expensive system modifications. DOD officials do not always budget the resources needed for interoperability testing. The military services sometimes allow service-unique requirements to take precedence over satisfying joint interoperability requirements. Various approval authorities allow some new systems to be fielded without verifying their certification status. DOD's interoperability watch list was implemented after our 1998 report to provide better oversight over the interoperability certification process. In January 2003, after considering our findings, DOD's Interoperability Senior Review Panel evaluated DCGS's progress toward interoperability certification and added the program to the interoperability watch list. Making its intelligence systems interoperable and enhancing their capability is a critical first step in DOD's effort to drive down time needed to identify and hit targets and otherwise enhance joint military operations. But DOD has been slow to plan for this initiative and it has not addressed important questions such as how and when systems will be pared down and modified as well as how the initiative will be funded. Moreover, DOD is fielding new systems and new versions of old systems without following its own certification process. If both problems are not promptly addressed, data sharing problems may still persist, precluding DOD from achieving its goals for quicker intelligence dissemination. Even for the DCGS systems, which are supposed to be interconnected over time, noncompliance with interoperability requirements continues to persist. We believe DOD should take a fresh look at the reasons for noncompliance and consider what mix of controls and incentives, including innovative funding mechanisms, are needed to ensure the interoperability of DCGS systems. To ensure that an effective Distributed Common Ground-Surface System is adequately planned and funded, we recommend that the Secretary of Defense direct the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence to expand the planning efforts for DCGS to include a migration plan or road map that at a minimum lays out (1) current system capabilities and desired capabilities; (2) specific initiatives, programs, projects and schedules to get DOD and the services to their goal; (3) measures to gauge success in implementing the migration plan as well as the enterprise architecture; and (4) mechanisms for ensuring that the plan is followed. We also recommend that the Secretary of Defense direct the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence to develop an investment strategy to identify what funds are available, both for the initial phases of the DCGS migration and transition to the target architecture, and whether there are gaps or constraints that need to be addressed. To ensure that systems critical to an effective DCGS are interoperable, we recommend that the Secretary of Defense take steps needed to enforce its certification process, including directing the service secretaries in collaboration with the Joint Staff, Acquisition Executives, and the Joint Interoperability Test Command to (1) examine reasons the services are slow to comply with its certification requirement and (2) mechanisms that can be implemented to instill better discipline in adhering to the certification requirement. If lack of funding is found to be a significant barrier, we recommend that the Secretary of Defense consider centrally funding the DCGS certification process as a pilot program. In commenting on a draft of this report, DOD concurred with our recommendations to expand the planning efforts for DCGS to include a migration plan and an investment strategy. It stated that it has already funded both projects. DOD also strongly supported our recommendation to take additional steps to enforce its certification process and described recent actions it has taken to do so. DOD partially concurred with our last recommendation to consider centrally funding the certification process if funding is found to be a significant barrier. While DOD supported this step if it is warranted, DOD believed it was premature to identify a solution without further definition of the problem. We agree that DOD needs to first examine the reasons for noncompliance and consider what mix of controls and incentives are needed to make the certification process work. At the same time, because funding has already been raised as a barrier, DOD should include an analysis of innovative funding mechanisms into its review. To achieve our objectives, we examined Department of Defense regulations, directives, instructions as well as the implementing instructions of the Chairman, Joint Chiefs of Staff, regarding interoperability and the certification process. We visited the Joint Interoperability Test Command in Fort Huachuca, Arizona, and obtained detailed briefings on the extent that intelligence, surveillance, and reconnaissance systems, including DCGS systems, have been certified. We visited and obtained detailed briefings on the interoperability issues facing the Combatant Commanders at Joint Forces Command in Norfolk, Virginia; Central Command in Tampa, Florida; and Pacific Command in Honolulu, Hawaii, including a videoconference with U.S. Forces Korea officials. We discussed the interoperability certification process and its implementation with officials in the Office of the Director, Operational Test and Evaluation; the Under Secretary of Defense for Acquisition, Technology and Logistics; and the Assistant Secretary of Defense for Command, Control, Communications and Intelligence. During these visits and additional visits to the intelligence and acquisition offices of the services, the National Imagery and Mapping Agency, and the National Security Agency, we obtained detailed briefings and examined documents such as the capstone requirements document involving the status and plan to implement the ground systems strategy. We conducted our review from December 2001 through February 2003 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 it until 7 days from the date of this report. At that time, we will send copies of this report to the other congressional defense committees and the Secretary of Defense. We will also provide copies to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-4841 if you or your staff have any questions concerning this report. Key contributors to this report were Keith Rhodes, Cristina Chaplain, Richard Strittmatter, and Matthew Mongin. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO's Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. 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Making sure systems can work effectively together (interoperability) has been a key problem for the Department of Defense (DOD) yet integral to its goals for enhancing joint operations. Given the importance of being able to share intelligence data quickly, we were asked to assess DOD's initiative to develop a common ground-surface-based intelligence system and to particularly examine (1) whether DOD has adequately planned this initiative and (2) whether its process for testing and certifying the interoperability of new systems is working effectively. DOD relies on a broad array of intelligence systems to study the battlefield and identify and hit enemy targets. These systems include reconnaissance aircraft, satellites, and ground-surface stations that receive, analyze, and disseminate intelligence data. At times, these systems are not interoperable--either for technical reasons (such as incompatible data formats) and/or operational reasons. Such problems can considerably slow down the time to identify and analyze a potential target and decide whether to attack it. One multibillion-dollar initiative DOD has underway to address this problem is to pare down the number of ground-surface systems that process intelligence data and upgrade them to enhance their functionality and ensure that they can work with other DOD systems. The eventual goal is an overarching family of interconnected systems, known as the Distributed Common Ground-Surface System (DCGS). To date, planning for this initiative has been slow and incomplete. DOD is developing an architecture, or blueprint, for the new systems as well as an overarching test plan and an operational concept. Although DCGS was started in 1998, DOD has not yet formally identified which systems are going to be involved in DCGS; what the time frames will be for making selections and modifications, conducting interoperability tests, and integrating systems into the overarching system; how transitions will be funded; and how the progress of the initiative will be tracked. Moreover, DOD's process for testing and certifying that systems will be interoperable is not working effectively. In fact, only 2 of 26 DCGS systems have been certified as interoperable. Because 21 of the systems that have not been certified have already been fielded, DOD has a greater risk that the new systems will not be able to share intelligence data as quickly as needed. Certifications are important because they consider such things as whether a system can work with systems belonging to other military services without unacceptable workarounds and whether individual systems conform to broader architectures designed to facilitate interoperability across DOD.
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Since the 1960s, there have been significant advances in protecting the rights and welfare of human subjects in biomedical and behavioral research. The federal presence has grown in this area, establishing and enforcing regulations for protecting human subjects in federally funded and federally regulated research. HHS' regulation of biomedical and behavioral research consists of two principal tiers of review: one at the federal level and one at the research institution level. Both tiers are responsible for ensuring that individual researchers and their research institutions comply with federal laws and regulations for protecting human subjects. When the core of HHS' human protection regulations was adopted by 15 other federal departments and agencies in 1991, it became known as the Common Rule. Within the HHS oversight system there are several entities overseeing compliance with human protection regulations. At the federal level are the NIH's OPRR and the FDA. At the local level, institutional review boards (IRB)--that is, review panels that are usually associated with a particular university or other research institution--are responsible for implementing federal human subject protection requirements for research conducted at or supported by their institutions. In general, IRB members are scientists and nonscientists who volunteer to review proposed studies. The Common Rule requires research institutions receiving federal support and federal agencies conducting research to establish IRBs to review research proposals for risk of harm to human subjects and to perform other duties to protect human research subjects. It also stipulates requirements related to informed consent--how researchers must inform potential subjects of the risks to which they, as study participants, agree to be exposed. HHS regulations contain additional protections not included in the Common Rule for research involving vulnerable populations--namely, pregnant women, fetuses, subjects of in vitro fertilization research, prisoners, and children. Preventing harm to human subjects' rights and welfare is the overarching goal of HHS' protection system. The organizational components of the system--OPRR, FDA, and local IRBs--have heightened the compliance of the research community with human protection guidelines through a variety of activities. OPRR's chief preventive measure is its assurance process. Assurances are contract-like agreements made by research institutions to comply with federal human subject protection requirements. Assurances include the following: a statement of ethical conduct principles, a guarantee that an IRB has been designated to approve and periodically review the institution's studies, and the specifics of the IRB's membership, responsibilities, and process for reviewing and approving proposals. An institution must have an assurance approved by OPRR before the institution can receive HHS research funding. Depending on an institution's willingness and expertise, as well as the requirements of specific research studies, OPRR can negotiate several different types of assurances. Through a multiple project assurance, for example, OPRR can delegate broad authority to an institution, allowing it to approve a wide array of research studies. Or, through a single project assurance, OPRR can retain the authority to approve studies one by one. As of November 1995, OPRR had 451 active multiple project assurances and over 3,000 active single project assurances. OPRR also had over 1,300 active cooperative project assurances, which pertain to multiple-site research projects. FDA works to prevent the occurrence of human subject protection violations in the drug research it regulates. Before permitting drug research with human subjects, FDA requires researchers to submit a brief statement that they will uphold ethical standards and identify the IRB that will examine their study. FDA can request modifications to proposals or reject proposals deemed to present unacceptable risk. IRBs play a major role in the protection of patients and healthy volunteers, according to federal officials and members of the research community alike. For each study conducted using human subjects, researchers must first get IRB approval. In fact, HHS will neither fund new human subject research nor authorize ongoing research to continue without IRB approval. The IRB's basic role when deciding whether to approve new research is to determine if the rights and welfare of subjects will be safeguarded. IRB members ensure that a study's procedures are consistent with sound research design and that the consent document conforms to federal rules for adequate informed consent. IRB reviews, however, generally do not involve direct observation of the research study or the process in which a subject's consent is obtained. IRB members are expected to recognize that certain research subjects--such as children, prisoners, the mentally disabled, and individuals who are economically or educationally disadvantaged--are likely to be vulnerable to coercion or undue influence. The local nature of most IRBs enables members to be familiar with the research institution's resources and commitments, the investigators' capabilities, and community values. IRBs are also required to review previously approved research periodically. The purpose of these continuing reviews is for IRBs to keep abreast of a study's potential for harm and benefit to subjects so that boards can decide whether the study should continue. No system of prevention is foolproof. Therefore, FDA's and OPRR's monitoring and enforcement efforts include review of results of IRB operations, clinical trials, and allegations of researcher misconduct. FDA's primary tool for monitoring human subject protection is its on-site inspections of the IRBs that oversee drug research. FDA's inspections of IRBs demonstrate that, at some institutions, compliance with federal oversight rules is uneven. Between January 1993 and November 1995, FDA issued 31 Warning Letters to institutions regarding significant deficiencies in the performance of their IRBs' oversight of drug research. Among the more serious violations cited were the following: participation of researchers as IRB members in reviewing their own studies, absence of a process for tracking ongoing studies, and failure to ensure that required elements of informed consent were contained in consent documents. The FDA Warning Letters terminated the IRBs' authority to approve new studies or to recruit new subjects into ongoing studies until FDA received adequate assurance of corrective action. From October 1993 to November 1995, FDA found less serious deficiencies involving about 200 other IRBs, such as failure to document the names of IRB members and failure of IRB minutes to identify controversial issues discussed. In addition to monitoring IRBs, FDA must be satisfied that manufacturers have complied with human subject protection regulations during clinical trials. To this end, FDA conducts on-site inspections of individual drug studies. When examining how a trial was conducted, FDA determines, for example, if subject selection criteria were followed, if subjects' consent was documented, and if adverse events were reported. FDA's principal focus in these efforts, however, is to verify the accuracy and completeness of study data as well as the researcher's adherence to the approved protocol. Most of the drug study violations FDA identifies are relatively minor. From 1977 to 1995, about one-half of the violations related to the adequacy of the informed consent forms. FDA also identifies more serious violations. Since 1980, FDA has taken 99 actions against 84 clinical investigators regarding their conduct of drug research with human subjects. It cited such instances of serious misconduct as failure to obtain informed consent; forgery of subjects' signatures on informed consent forms; failure to inform patients that a drug was experimental; and failure to report subjects' adverse reactions to drugs under study, including a subject's death. FDA has used four types of actions to enforce its regulations: (1) obtaining a promise from a researcher to abide by FDA requirements for conducting drug research, (2) invoking a range of restrictions on a researcher's use of investigational drugs, (3) disqualifying a researcher from the use of investigational drugs, and (4) criminally prosecuting a researcher. OPRR also responds to inquiries and investigates allegations of potential harm to human subjects. These inquiries and investigations are largely handled by telephone and correspondence; few investigations result in site visits. Over the past 5 years, OPRR has investigated numerous allegations of serious human subject protection violations. One such example was OPRR's investigation of whether informed consent procedures clearly identified the risk of death to volunteers in the tamoxifen breast cancer prevention trial. OPRR found that informed consent documents at some sites failed to identify some of tamoxifen's potentially fatal risks, such as uterine cancer, liver cancer, and embolism. In another instance, OPRR compliance investigators found deficiencies in informed consent and in IRB review procedures in a joint NIH-French study of HIV-positive subjects in Zaire. Among cases currently under investigation are allegations that researchers at a university-based fertility clinic transferred eggs from unsuspecting donors to other women, without consent of the donors. In many cases, OPRR has required institutions to take corrective action. In some instances, OPRR has suspended an institution's authority to conduct further research in a particular area until problems with its IRBs were fixed. From 1990 to mid-1995, there were 17 instances in which OPRR imposed some type of restriction on an institution's authority to conduct human subject research. Oversight systems are by nature limited to minimizing, rather than fully eliminating, the potential for mishap, and HHS' system for protecting human subjects is no exception. Various factors reduce or threaten to reduce the effectiveness of IRBs, OPRR, and FDA. First, pressure from heavy workloads and competing priorities can weaken IRB oversight. In some cases, the sheer number of studies necessitates that IRBs spend only 1 or 2 minutes of review per study. Some IRBs allow administrative staff with no scientific expertise--not board members themselves--to review continuing review forms, ensuring only that the information has been provided. The independence of IRB reviews can be compromised in cases in which IRB members have close collegial ties with researchers at their institutions, when there are pressures from institution officials to attract and retain funding, when IRB members have financial ties to the study, and when IRB members are reluctant to criticize studies led by leading scientists. The increasing complexity of research makes it difficult for some IRBs to adequately assess human subject protection issues when members are not conversant with the technical aspects of a proposed study, or when studies raise ethical questions that have not been satisfactorily resolved within the research community. Given the growing number of large-scale trials, if most involved IRBs have approved a proposed study, then IRBs at other institutions may feel pressured to mute their concerns about the study. Pressures to recruit subjects can lead some researchers and IRBs to overlook informed consent deficiencies. Second, various factors may hamper OPRR oversight. OPRR staff make no site visits during assurance negotiations; instead, they review an institution's written application and conduct written or oral follow-up. In contrast, on the basis of experience gained from on-site investigations for compliance purposes, OPRR staff told us that their ability to evaluate an institution's human protection system is greatly enhanced by direct observation and personal interaction with IRB staff, IRB members, and researchers. In the future, OPRR expects to conduct from 12 to 24 technical assistance visits annually to institutions holding OPRR assurances. NIH's organizational structure may hamper the independence of OPRR with respect to its oversight of studies conducted by NIH's Office of Intramural Research. From a broad organizational perspective, a potential weakness exists because NIH is both the regulator of human subject protections as well as an agency conducting its own research programs. The NIH Director, therefore, has responsibility for both the success of NIH's intramural research programs and the enforcement of human subject protection regulations by OPRR. Third, FDA's inspections of drug research may permit violations to go undetected. FDA's inspection program is geared more toward protecting the eventual consumer of the drug than the subjects on whom the drug was tested. FDA does not inspect all drug studies but concentrates its efforts on commercial products likely to be approved for consumer use. Furthermore, FDA's routine on-site inspections of drug studies are conducted only after clinical trials have concluded and subjects have completed their participation. Gaps also exist in FDA's inspection of IRBs. FDA's Center for Drug Evaluation and Research annually issues the results of about 158 inspections of the approximately 1,200 IRBs reviewing drug studies, although its goal has been to complete and issue reports on about 250 inspections each year. We found that in one of FDA's 21 districts--one that contains several major research centers conducting studies with human subjects--12 IRBs had not been inspected for 10 or more years. Furthermore, FDA is 3 to 5 years behind in its scheduled reinspection of some IRBs with which it had noted problems. FDA officials told us that some of its inspectors may be inadequately prepared to understand the human subject protection implications of drug studies and to ask meaningful follow-up questions on the research protocols they review. Fourth, additional pressures make it difficult to guarantee the protection of human subjects. When seriously ill individuals, such as some HIV patients, equate experimental and proven therapies, some question the need for protections that appear only to restrict their access to therapy. When physician-researchers do not clearly distinguish between research and treatment in their attempt to inform subjects, the possible benefits of a study can be overemphasized and the risks minimized. When physicians use an innovative but unproven technique to treat patients, they may not consider the procedure to be research. Such treatments, however, could constitute unregulated research, placing people at risk of harm from unproven techniques. Our work suggests that over the last 3 decades federal regulators and members of the research community have improved the protection of human research participants. However, holes inevitably exist in the regulatory net because no oversight system can guarantee complete protection for each individual. The goals remain to encourage researchers' ethical behavior without hobbling scientific research and to refine regulations and oversight activities to further improve subject protections. Given the many pressures that can weaken the effectiveness of the protection system, continued vigilance is critical to ensuring that subjects are protected from harm. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or the other Members may have. For more information about this testimony, please call Bruce D. Layton, Assistant Director, at (202) 512-7119. Other major contributors included Frederick K. Caison, Linda S. Lootens, and Hannah F. Fein. 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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GAO discussed the Department of Health and Human Services' (HHS) efforts to protect human research subjects, focusing on the prevention, monitoring, and enforcement activities of the National Institutes of Health's Office for Protection from Research Risks (OPRR) and the Food and Drug Administration (FDA). GAO noted that: (1) to ensure the protection of human research subjects, the agencies require researchers to make assurance agreements that they will comply with federal human subject protection requirements and uphold ethical standards; (2) the agencies also use institutional review boards (IRB), local review panels that review research plans to ensure that human subjects are protected; (3) both FDA and OPRR conduct on-site visits and inspections, clinical trials, investigations of allegations of researcher misconduct, and IRB reviews to identify violations of protection requirements; (4) to enforce the regulations, FDA and OPRR have requested modifications to research plans, restricted researchers' use of drugs, disqualified, suspended, or criminally prosecuted researchers; and (5) oversight effectiveness is hampered by heavy IRB workloads and competing priorities, organizational conflicts-of-interest, limited site visits and inspections, and pressures resulting from differing perceptions on the need for research versus treatment.
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Category I special nuclear materials are present at the three design laboratories--the Los Alamos National Laboratory in Los Alamos, New Mexico; the Lawrence Livermore National Laboratory in Livermore, California; and the Sandia National Laboratory in Albuquerque, New Mexico--and two production sites--the Pantex Plant in Amarillo, Texas, and the Y-12 Plant in Oak Ridge, Tennessee, operated by NNSA. Special nuclear material is also present at former production sites, including the Savannah River Site in Savannah River, South Carolina, and the Hanford Site in Richland, Washington. These former sites are now being cleaned up by DOE's Office of Environmental Management (EM). Furthermore, NNSA's Office of Secure Transportation transports these materials among the sites and between the sites and DOD bases. Contractors operate each site for DOE. NNSA and EM have field offices collocated with each site. In fiscal year 2004, NNSA and EM expect to spend nearly $900 million on physical security at their sites. Physical security combines security equipment, personnel, and procedures to protect facilities, information, documents, or material against theft, sabotage, diversion, or other criminal acts. In addition to NNSA and EM, DOE has other important security organizations. DOE's Office of Security develops and promulgates orders and policies, such as the DBT, to guide the department's safeguards and security programs. DOE's Office of Independent Oversight and Performance Assurance supports the department by, among other things, independently evaluating the effectiveness of contractors' performance in safeguards and security. It also performs follow-up reviews to ensure that contractors have taken effective corrective actions and appropriately addressed weaknesses in safeguards and security. Under a recent reorganization, these two offices were incorporated into the new Office of Security and Safety Performance Assurance. Each office, however, retains its individual missions, functions, structure, and relationship to the other. The risks associated with Category I special nuclear materials vary but include the nuclear detonation of a weapon or test device at or near design yield, the creation of improvised nuclear devices capable of producing a nuclear yield, theft for use in an illegal nuclear weapon, and the potential for sabotage in the form of radioactive dispersal. Because of these risks, DOE has long employed risk-based security practices. The key component of DOE's well-established, risk-based security practices is the DBT, a classified document that identifies the characteristics of the potential threats to DOE assets. The DBT has been traditionally based on a classified, multiagency intelligence community assessment of potential terrorist threats, known as the Postulated Threat. The DBT considers a variety of threats in addition to the terrorist threat. Other adversaries considered in the DBT include criminals, psychotics, disgruntled employees, violent activists, and spies. The DBT also considers the threat posed by insiders, those individuals who have authorized, unescorted access to any part of DOE facilities and programs. Insiders may operate alone or may assist an adversary group. Insiders are routinely considered to provide assistance to the terrorist groups found in the DBT. The threat from terrorist groups is generally the most demanding threat contained in the DBT. DOE counters the terrorist threat specified in the DBT with a multifaceted protective system. While specific measures vary from site to site, all protective systems at DOE's most sensitive sites employ a defense-in- depth concept that includes sensors, physical barriers, hardened facilities and vaults, and heavily armed paramilitary protective forces equipped with such items as automatic weapons, night vision equipment, body armor, and chemical protective gear. Depending on the material, protective systems at DOE Category I special nuclear material sites are designed to accomplish the following objectives in response to the terrorist threat: Denial of access. For some potential terrorist objectives, such as the creation of an improvised nuclear device, DOE may employ a protection strategy that requires the engagement and neutralization of adversaries before they can acquire hands-on access to the assets. Denial of task. For nuclear weapons or nuclear test devices that terrorists might seek to steal, DOE requires the prevention and/or neutralization of the adversaries before they can complete a specific task, such as stealing such devices. Containment with recapture. Where the theft of nuclear material (instead of a nuclear weapon) is the likely terrorist objective, DOE requires that adversaries not be allowed to escape the facility and that DOE protective forces recapture the material as soon as possible. This objective requires the use of specially trained and well-equipped special response teams. The effectiveness of the protective system is formally and regularly examined through vulnerability assessments. A vulnerability assessment is a systematic evaluation process in which qualitative and quantitative techniques are applied to detect vulnerabilities and arrive at effective protection of specific assets, such as special nuclear material. To conduct such assessments, DOE uses, among other things, subject matter experts, such as U.S. Special Forces; computer modeling to simulate attacks; and force-on-force performance testing, in which the site's protective forces undergo simulated attacks by a group of mock terrorists. The results of these assessments are documented at each site in a classified document known as the Site Safeguards and Security Plan. In addition to identifying known vulnerabilities, risks, and protection strategies for the site, the Site Safeguards and Security Plan formally acknowledges how much risk the contractor and DOE are willing to accept. Specifically, for more than a decade, DOE has employed a risk management approach that seeks to direct resources to its most critical assets--in this case Category I special nuclear material--and mitigate the risks to these assets to an acceptable level. Levels of risk--high, medium, and low--are assigned classified numerical values and are derived from a mathematical equation that compares a terrorist group's capabilities with the overall effectiveness of the crucial elements of the site's protective forces and systems. Historically, DOE has striven to keep its most critical assets at a low risk level and may insist on immediate compensatory measures should a significant vulnerability develop that increases risk above the low risk level. Compensatory measures could include such things as deploying additional protective forces or curtailing operations until the asset can be better protected. In response to a September 2000 DOE Inspector General's report recommending that DOE establish a policy on what actions are required once high or moderate risk is identified, in September 2003, DOE's Office of Security issued a policy clarification stating that identified high risks at facilities must be formally reported to the Secretary of Energy or Deputy Secretary within 24 hours. In addition, under this policy clarification, identified high and moderate risks require corrective actions and regular reporting. Through a variety of complementary measures, DOE ensures that its safeguards and security policies are being complied with and are performing as intended. Contractors perform regular self-assessments and are encouraged to uncover any problems themselves. DOE Orders also require field offices to comprehensively survey contractors' operations for safeguards and security every year. DOE's Office of Independent Oversight and Performance Assurance provides yet another check through its comprehensive inspection program. All deficiencies identified during surveys and inspections require the contractors to take corrective action. In the immediate aftermath of September 11, 2001, DOE officials realized that the then current DBT, issued in April 1999 and based on a 1998 intelligence community assessment, was obsolete. The September 11, 2001, terrorist attacks suggested larger groups of terrorists, larger vehicle bombs, and broader terrorist aspirations to cause mass casualties and panic than were envisioned in the 1999 DOE DBT. However, formally recognizing these new threats by updating the DBT was difficult and took 21 months because of delays in issuing the Postulated Threat, debates over the size of the future threat and the cost to meet it, and the DOE policy process. As mentioned previously, DOE's new DBT is based on a study known as the Postulated Threat, which was developed by the U.S. intelligence community. The intelligence community originally planned to complete the Postulated Threat by April 2002; however, the document was not completed and officially released until January 2003, about 9 months behind the original schedule. According to DOE and DOD officials, this delay resulted from other demands placed on the intelligence community after September 11, 2001, as well as from sharp debates among the organizations developing the Postulated Threat over the size and capabilities of future terrorist threats and the resources needed to meet these threats. While waiting for the new Postulated Threat, DOE developed several drafts of its new DBT. During this process, debates, similar to those that occurred during the development of the Postulated Threat, emerged in DOE. Like the participants responsible for developing the Postulated Threat, during the development of the DBT, DOE officials debated the size of the future terrorist threat and the costs to meet it. DOE officials at all levels told us that concern over resources played a large role in developing the 2003 DBT, with some officials calling the DBT the "funding basis threat," or the maximum threat the department could afford. This tension between threat size and resources is not a new development. According to a DOE analysis of the development of prior DBTs, political and budgetary pressures and the apparent desire to reduce the requirements for the size of protective forces appear to have played a significant role in determining the terrorist group numbers contained in prior DBTs. Finally, DOE developed the DBT using DOE's policy process, which emphasizes developing consensus through a review and comment process by program offices, such as EM and NNSA. However, many DOE and contractor officials found that the policy process for developing the new DBT was laborious and not timely, especially given the more dangerous threat environment that has existed since September 11, 2001. As a result, during the time it took DOE to develop the new DBT, its sites were only required to defend against the terrorist group defined in the 1999 DBT, which, in the aftermath of September 11, 2001, DOE officials realized was obsolete. While the May 2003 DBT identifies a larger terrorist group than did the previous DBT, the threat identified in the new DBT, in most cases, is less than the terrorist threat identified in the intelligence community's Postulated Threat. The Postulated Threat estimated that the force attacking a nuclear weapons site would probably be a relatively small group of terrorists, although it was possible that an adversary might use a greater number of terrorists if that was the only way to attain an important strategic goal. In contrast to the Postulated Threat, DOE is preparing to defend against a significantly smaller group of terrorists attacking many of its facilities. Specifically, only for its sites and operations that handle nuclear weapons is DOE currently preparing to defend against an attacking force that approximates the lower range of the threat identified in the Postulated Threat. For its other Category I special nuclear material sites, all of which fall under the Postulated Threat's definition of a nuclear weapons site, DOE is requiring preparations to defend against a terrorist force significantly smaller than was identified in the Postulated Threat. DOE calls this a graded threat approach. Some of these other sites, however, may have improvised nuclear device concerns that, if successfully exploited by terrorists, could result in a nuclear detonation. Nevertheless, under the graded threat approach, DOE requires these sites only to be prepared to defend against a smaller force of terrorists than was identified by the Postulated Threat. Officials in DOE's Office of Independent Oversight and Performance Assurance disagreed with this approach and noted that sites with improvised nuclear device concerns should be held to the same requirements as facilities that possess nuclear weapons and test devices since the potential worst-case consequence at both types of facilities would be the same--a nuclear detonation. Other DOE officials and an official in DOD's Office of the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence disagreed with the overall graded threat approach, believing that the threat should not be embedded in the DBT by adjusting the number of terrorists that might attack a particular target. DOE Office of Security officials cited three reasons for why the department departed from the Postulated Threat's assessment of the potential size of terrorist forces. First, these officials stated that they believed that the Postulated Threat only applied to sites that handled completed nuclear weapons and test devices. However, both the 2003 Postulated Threat, as well as the preceding 1998 Postulated Threat, state that the threat applies to nuclear weapons and special nuclear material without making any distinction between them. Second, DOE Office of Security officials believed that the higher threat levels contained in the 2003 Postulated Threat represented the worst potential worldwide terrorist case over a 10-year period. These officials noted that while some U.S. assets, such as military bases, are located in parts of the world where terrorist groups receive some support from local governments and societies thereby allowing for an expanded range of capabilities, DOE facilities are located within the United States, where terrorists would have a more difficult time operating. Furthermore, DOE Office of Security officials stated that the DBT focuses on a nearer-term threat of 5 years. As such, DOE Office of Security officials said that they chose to focus on what their subject matter experts believed was the maximum, credible, near-term threat to their facilities. However, while the 1998 Postulated Threat made a distinction between the size of terrorist threats abroad and those within the United States, the 2003 Postulated Threat, reflecting the potential implications of the September 2001 terrorist attacks, did not make this distinction. Finally, DOE Office of Security officials stated that the Postulated Threat document represented a reference guide instead of a policy document that had to be rigidly followed. The Postulated Threat does acknowledge that it should not be used as the sole consideration to dictate specific security requirements and that decisions regarding security risks should be made and managed by decision makers in policy offices. However, DOE has traditionally based its DBT on the Postulated Threat. For example, the prior DBT, issued in 1999, adopted exactly the same terrorist threat size as was identified by the 1998 Postulated Threat. Finally, the department's criteria for determining the severity of radiological, chemical, and biological sabotage may be insufficient. For example, the criterion used for protection against radiological sabotage is based on acute radiation dosages received by individuals. However, this criterion may not fully capture or characterize the damage that a major radiological dispersal at a DOE site might cause. For example, according to a March 2002 DOE response to a January 23, 2002, letter from Representative Edward J. Markey, a worst-case analysis at one DOE site showed that while a radiological dispersal would not pose immediate, acute health problems for the general public, the public could experience measurable increases in cancer mortality over a period of decades after such an event. Moreover, releases at the site could also have environmental consequences requiring hundreds of millions to billions of dollars to clean up. Contamination could also affect habitability for tens of miles from the site, possibly affecting hundreds of thousands of residents for many years. Likewise, the same response showed that a similar event at a NNSA site could result in a dispersal of plutonium that could contaminate several hundred square miles and ultimately cause thousands of cancer deaths. For chemical sabotage standards, the 2003 DBT requires sites to protect to industry standards. However, we reported March 2003 year that such standards currently do not exist. Specifically, we found that no federal laws explicitly require chemical facilities to assess vulnerabilities or take security actions to safeguard their facilities against a terrorist attack. Finally, the protection criteria for biological sabotage are based on laboratory safety standards developed by the U.S. Centers for Disease Control and not physical security standards. In response to our concerns, DOE recently agreed to reexamine some of the key aspects and assumptions of the May 2003 DBT. DOE expects to complete this review by June 30, 2004. While DOE issued the final DBT in May 2003, it has only recently resolved a number of significant issues that may affect the ability of its sites to fully meet the threat contained in the new DBT in a timely fashion and is still addressing other issues. Fully resolving all of these issues may take several years, and the total cost of meeting the new threats is currently unknown. Because some sites will be unable to effectively counter the higher threat contained in the new DBT for up to several years, these sites should be considered to be at higher risk under the new DBT than they were under the old DBT. In order to undertake the necessary range of vulnerability assessments to accurately evaluate their level of risk under the new DBT and implement necessary protective measures, DOE recognized that it had to complete a number of key activities. DOE only recently completed three of these key activities. First, in February 2004, DOE issued its revised Adversary Capabilities List, which is a classified companion document to the DBT, that lists the potential weaponry, tactics, and capabilities of the terrorist group described in the DBT. This document has been amended to include, among other things, heavier weaponry and other capabilities that are potentially available to terrorists who might attack DOE facilities. DOE is continuing to review relevant intelligence information for possible incorporation into future revisions of the Adversary Capabilities List. Second, DOE also only recently provided additional DBT implementation guidance. In a July 2003 report, DOE's Office of Independent Oversight and Performance Assurance noted that DOE sites had found initial DBT implementation guidance confusing. For example, when the Deputy Secretary of Energy issued the new DBT in May 2003, the cover memo said the new DBT was effective immediately but that much of the DBT would be implemented in fiscal years 2005 and 2006. According to a 2003 report by the Office of Independent Oversight and Performance Assurance, many DOE sites interpreted this implementation period to mean that they should, through fiscal year 2006, only be measured against the previous, less demanding 1999 DBT. In response to this confusion, the Deputy Secretary issued further guidance in September 2003 that called for the following, among other things: DOE's Office of Security to issue more specific guidance by October 22, 2003, regarding DBT implementation expectations, schedules, and requirements. DOE issued this guidance January 30, 2004. Quarterly reports showing sites' incremental progress in meeting the new DBT for ongoing activities. The first series of quarterly progress reports may be issued in July 2004. Immediate compliance with the new DBT for new and reactivated operations. A third important DBT-related issue was just completed in early April 2004. A special team created in the 2003 DBT, composed of weapons designers and security specialists, finalized its report on each site's improvised nuclear device vulnerabilities. The results of this report were briefed to senior DOE officials in March 2004 and the Deputy Secretary of Energy issued guidance, based on this report, to DOE sites in early April 2004. As a result, some sites may be required under the 2003 DBT to shift to enhanced protection strategies, which could be very costly. This special team's report may most affect EM sites because their improvised nuclear device potential had not previously been explored. Fourth, as mentioned earlier, DOE recently agreed to reexamine some of the key aspects and assumptions of the new DBT. DOE expects to complete this review by June 30, 2004. If DOE's reexamination results in a revised DBT that contains increases in terrorist threat levels or changed assumptions regarding the threats it faces, DOE sites could need additional security funding. Finally, DOE's Office of Security has not completed all of the activities associated with the new vulnerability assessment methodology it has been developing for over a year. DOE's Office of Security believes this methodology, which uses a new mathematical equation for determining levels of risk, will result in a more sensitive and accurate portrayal of each site's defenses-in-depth and the effectiveness of sites' protective systems (i.e., physical security systems and protective forces) when compared with the new DBT. DOE's Office of Security decided to develop this new equation because its old mathematical equation had been challenged on technical grounds and did not give sites credit for the full range of their defenses-in-depth. While DOE's Office of Security completed this equation in December 2002, officials from this office believe it will probably not be completely implemented at the sites for at least another year for two reasons. First, site personnel who implement this methodology will require additional training to ensure they are employing it properly. DOE's Office of Security conducted initial training in December 2003, as well as a prototype course in February 2004, and has developed a nine-course vulnerability assessment certification program. Second, sites will have to collect additional data to support the broader evaluation of their protective systems against the new DBT. Collecting these data will require additional computer modeling and force-on-force performance testing. Because of the slow resolution of some of these issues, DOE has not developed any official long-range cost estimates or developed any integrated, long-range implementation plans for the May 2003 DBT. Specifically, neither the fiscal year 2003 nor 2004 budgets contained any provisions for DBT implementation costs. However, during this period, DOE did receive additional safeguards and security funding through budget reprogramming and supplemental appropriations. DOE is using most of these additional funds to cover the higher operational costs associated with the increased security condition (SECON) measures. DOE has gathered initial DBT implementation budget data and has requested additional DBT implementation funding in the fiscal year 2005 budget: $90 million for NNSA, $18 million for the Secure Transportation Asset within the Office of Secure Transportation, and $26 million for EM. However, DOE officials believe the budget data collected so far has been of generally poor quality because most sites have not yet completed the necessary vulnerability assessments to determine their resource requirements. Consequently, the fiscal year 2006 budget may be the first budget to begin to accurately reflect the safeguards and security costs of meeting the requirements of the new DBT. Reflecting these various delays and uncertainties, in September 2003, the Deputy Secretary changed the deadline for DOE program offices, such as EM and NNSA, to submit DBT implementation plans from the original target of October 2003 to the end of January 2004. NNSA and EM approved these plans in February 2004. DOE's Office of Security has reviewed these plans and is planning to provide implementation assistance to sites that request it. DOE officials have described these plans as being ambitious in terms of the amount of work that has to be done within a relatively short time frame and dependent on continued increases in safeguards and security funding, primarily for additional protective force personnel. However, some plans may be based on assumptions that are no longer valid. Revising these plans could require additional resources, as well as add time to the DBT implementation process. A DOE Office of Budget official told us that current DBT implementation cost estimates do not include items such as closing unneeded facilities, transporting and consolidating materials, completing line item construction projects, and other important activities that are outside of the responsibility of the safeguards and security program. For example, EM's Security Director told us that for EM to fully comply with the DBT requirements in fiscal year 2006 at one of its sites, it will have to close and de-inventory two facilities, consolidate excess materials into remaining special nuclear materials move consolidated Category I special nuclear material, which NNSA's Office of Secure Transportation will transport, to another site. Likewise, the EM Security Director told us that to meet the DBT requirements at another site, EM will have to accelerate the closure of one facility and transfer special nuclear material to another facility on the site. The costs to close these facilities and to move materials within a site are borne by the EM program budget and not by the EM safeguards and security budget. Similarly, the costs to transport the material between sites are borne by NNSA's Office of Secure Transportation budget and not by EM's safeguards and security budget. A DOE Office of Budget official told us that a comprehensive, department-wide approach to budgeting for DBT implementation that includes such important program activities as described above is needed; however, such an approach does not currently exist. The department plans to complete DBT implementation by the end of fiscal year 2006. However, most sites estimate that it will take 2 to 5 years, if they receive adequate funding, to fully meet the requirements of the new DBT. During this time, sites will have to conduct vulnerability assessments, undertake performance testing, and develop Site Safeguards and Security Plans. Consequently, full DBT implementation could occur anywhere from fiscal year 2005 to fiscal year 2008. Some sites may be able to move more quickly and meet the department's deadline of the end of fiscal year 2006. Because some sites will be unable to effectively counter the threat contained in the new DBT for a period of up to several years, these sites should be considered to be at higher risk under the new DBT than they were under the old DBT. For example, the Office of Independent Oversight and Performance Assurance has concluded in recent inspections that at least two DOE sites face fundamental and not easily resolved security problems that will make meeting the requirements of the new DBT difficult. For other DOE sites, their level of risk under the new DBT remains largely unknown until they can conduct the necessary vulnerability assessments. In closing, while DOE struggled to develop its new DBT, the DBT that DOE ultimately developed is substantially more demanding than the previous one. Because the new DBT is more demanding and because DOE wants to implement it by end of fiscal year 2006--a period of about 29 months--DOE must press forward with a series of additional actions to ensure that it is fully prepared to provide a timely and cost effective defense of its most sensitive facilities. First, because the September 11, 2001, terrorist attacks suggested larger groups of terrorists with broader aspirations for causing mass casualties and panic, we believe that the DBT development process that was used requires reexamination. While DOE may point to delays in the development of the Postulated Threat as the primary reason for the almost 2 years it took to develop a new DBT, DOE was also working on the DBT itself for most of that time. We believe the difficulty associated with developing a consensus using DOE's traditional policy-making process was a key factor in the time it took to develop a new DBT. During this extended period, DOE's sites were only being defended against what was widely recognized as an obsolete terrorist threat level. Second, we are concerned about two aspects of the resulting DBT. We are not persuaded that there is sufficient difference, in its ability to achieve the objective of causing mass casualties or creating public panic, between the detonation of an improvised nuclear device and the detonation of a nuclear weapon or test device at or near design yield that warrants setting the threat level at a lower number of terrorists. Furthermore, while we applaud DOE for adding additional requirements to the DBT such as protection strategies to guard against radiological, chemical, and biological sabotage, we believe that DOE needs to reevaluate its criteria for terrorist acts of sabotage, especially in the chemical area, to make it more defensible from a physical security perspective. We are encouraged that the Department has agreed to reexamine the May 2003 DBT. Finally, because some sites will be unable to effectively counter the threat contained in the new DBT for a period of up to several years, these sites should be considered to be at higher risk under the new DBT than they were under the old DBT. As a result, DOE needs to take a series of actions to mitigate these risks to an acceptable level as quickly as possible. To accomplish this, it is important for DOE to go about the hard business of a comprehensive department-wide approach to implementing needed changes in its protective strategy. Because the consequences of a successful terrorist attack on a DOE site could be so devastating, we believe it is important for DOE to better inform Congress about what sites are at high risk and what progress is being made to reduce these risks to acceptable levels. Mr. Chairman, this concludes our prepared statement. We would be happy to respond to any questions that you or Members of the Subcommittee may have. For further information on this testimony, please contact Robin M. Nazzaro at (202) 512-3841. James Noel and Jonathan Gill also made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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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A successful terrorist attack on Department of Energy (DOE) sites containing nuclear weapons or the material used in nuclear weapons could have devastating consequences for the site and its surrounding communities. Because of these risks, DOE needs an effective safeguards and security program. A key component of an effective program is the design basis threat (DBT), a classified document that identifies, among other things, the potential size and capabilities of terrorist forces. The terrorist attacks of September 11, 2001, rendered the then-current DBT obsolete, resulting in DOE issuing a new version in May 2003. GAO (1) identified why DOE took almost 2 years to develop a new DBT, (2) analyzed the higher threat in the new DBT, and (3) identified remaining issues that need to be resolved in order for DOE to meet the threat contained in the new DBT. DOE took a series of actions in response to the terrorist attacks of September 11, 2001. While each of these has been important, in and of themselves, they are not sufficient to ensure that all of DOE's sites are adequately prepared to defend themselves against the higher terrorist threat present in the post September 11, 2001 world. Specifically, GAO found that DOE took almost 2 years to develop a new DBT because of (1) delays in developing an intelligence community assessment--known as the Postulated Threat--of the terrorist threat to nuclear weapon facilities, (2) DOE's lengthy comment and review process for developing policy, and (3) sharp debates within DOE and other government organizations over the size and capabilities of future terrorist threats and the availability of resources to meet these threats. While the May 2003 DBT identifies a larger terrorist threat than did the previous DBT, the threat identified in the new DBT, in most cases, is less than the threat identified in the intelligence community's Postulated Threat, on which the DBT has been traditionally based. The new DBT identifies new possible terrorist acts such as radiological, chemical, or biological sabotage. However, the criteria that DOE has selected for determining when facilities may need to be protected against these forms of sabotage may not be sufficient. For example, for chemical sabotage, the 2003 DBT requires sites to protect to "industry standards;" however, such standards currently do not exist. In response to these concerns, DOE has recently agreed to reexamine some of the key aspects and assumptions of the May 2003 DBT. DOE has been slow to resolve a number of significant issues, such as issuing additional DBT implementation guidance, developing DBT implementation plans, and developing budgets to support these plans, that may affect the ability of its sites to fully meet the threat contained in the new DBT in a timely fashion. Consequently, DOE's deadline to meet the requirements of the new DBT by the end of fiscal year 2006 is probably not realistic for some sites.
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For each fiscal year, the District is required under P.L. 103-373 to develop and submit to Congress a statement of measurable and objective performance goals for all significant activities of the District government. After each fiscal year, the District is to report on its performance. The District's performance report is to include: a statement of the actual level of performance achieved compared to each of the goals stated in the performance accountability plan for the year, the title of the District of Columbia management employee most directly responsible for the achievement of each goal and the title of the employee's immediate supervisor or superior, and a statement of the status of any court orders applicable to the District of Columbia government and the steps taken by the government to comply with such orders. Last year, on two occasions, we highlighted the challenges faced and progress made by the District in implementing a sound performance management system. In April 2000, we reported that the District's first performance report, covering fiscal year 1999, lacked some of the required information. Specifically, the performance report did not contain (1) performance data for most of its goals, (2) the titles of managers and their supervisors responsible for each of the goals, and (3) information on any of the court orders applicable to the District government during fiscal year 1999. Also, it did not cover all significant District activities. In October 2000, we testified before the Subcommittee on Oversight of Government Management, Restructuring and the District of Columbia, Senate Committee on Governmental Affairs, that the District had made progress in defining clear goals and desired outcomes through its strategic planning efforts. However, we also said that there were still opportunities to more fully integrate various aspects of its planning process and ensure that performance information was sufficiently credible for decision- making and accountability. Our objectives were to ascertain the extent to which the District's fiscal year 2000 report was useful for understanding the District's performance in fiscal year 2000 and the degree to which it complies with its statutory reporting requirements. To determine if the performance assessment itself could provide a useful characterization of the District's fiscal year 2000 performance, we conducted a process evaluation. This included identifying the components of the process used to develop goals and measures, the agencies included, when the goals were revised, and whether the final goals were developed in a timely manner to allow valid performance assessment during fiscal year 2000. To determine if the report complied with reporting requirements, we compared the report contents to the legislatively mandated requirements. To acquire additional information and verify our findings, we interviewed a key District official responsible for coordinating the performance assessment. We conducted our work from March through May 2001 at the Office of the Mayor of the District of Columbia in accordance with generally accepted government auditing standards. We did not verify the accuracy or reliability of the performance data included in the District's report. We provided a draft of this report to the Deputy Mayor/City Administrator of the District of Columbia for review and comment. Comments are reflected in the agency comments section of this report. In accordance with requirements established in P.L. 103-373, we consulted with a representative for the Director of the Office of Management and Budget concerning our review. The District's performance report reflects a performance management process that led to goals continually changing throughout fiscal year 2000 as the District worked to improve the process. The performance plan (initial goals) for fiscal year 2000 was submitted to Congress in June 1999 along with the District's budget. The District subsequently implemented what became an iterative approach for developing new goals and revising existing goals for about 20 "critical" agencies. That is, in addition to establishing initial performance goals, the District developed (1) agency strategic plans, (2) performance contracts, and (3) a Mayor's Scorecard for each of the critical agencies. The performance goals generated as part of these efforts were developed during the period March 1999 through March 2000. These initiatives led to the development of the set of goals that the District considered as its final fiscal year 2000 goals for each of the critical agencies. For example, the Department of Health extensively revised its initial five goals. After going through various planning exercises, the department eliminated three of the initial goals, combined the remaining two goals under one broader final goal, and added seven completely new final goals. The initial goals of the noncritical agencies changed during the fiscal year, but without going through the same process as that for the critical agencies. The District official responsible for coordinating the fiscal year 2000 performance assessment estimated that between 30 to 40 percent of the noncritical agencies' goals were revised over the fiscal year 2000 performance assessment period. Although, some goals were finalized earlier, the set of final fiscal year 2000 goals for all agencies, whose performance was assessed, were submitted to Congress along with the District's fiscal year 2001 budget in June 2000. One result of this process to redefine goals was that 54 percent of the initial goals were not used as final goals. For example, the Department of Motor Vehicles' goal to seek out regular feedback on the level and quality of service was not used as a final fiscal year 2000 goal. Although the department developed several final goals related to improving customer service, such as wait times for vehicle registration, it did not continue the goal to obtain feedback directly from its customers. No explanation was provided in the report to explain why the goal was dropped or whether it had been achieved. Many of the remaining 46 percent of the original goals were significantly revised by the time the District issued its report, making it difficult to determine the degree to which the original goals were achieved. District officials have indicated they plan to use an approach similar to fiscal year 2000's for determining performance goals and measures in succeeding years. That is, they plan to define each fiscal year's goals and measures during the fiscal year in which performance is being assessed. They expect that performance goals and measures will not stabilize into a consistent set until fiscal year 2003. The District's changing goals are reflected in its the fiscal year 2000 Performance Accountability Report, which provides information for three sets of performance goals. It provides information regarding the disposition of initial fiscal year 2000 goals. That is, the report indicates which goals made it into the final set used to assess fiscal year 2000 performance and which of the remaining initial goals, which were not considered by the District to be part of its final fiscal year 2000 goals, were nevertheless achieved. The second set of performance goals that are addressed in the report are those developed for the Mayor's Scorecard. The goals in the Mayor's Scorecard were developed to address priorities set by residents at the District's Citizen Summit and the Neighborhood Action Forum. The last set of goals addressed in the report are the District's final goals, which were included with the District's fiscal year 2001 budget submittal to Congress in June 2000. The lack of information on the extensive revisions that the District made to its performance goals, measures, and plans, limit the usefulness of the subsequent performance report for purposes of oversight, transparency, accountability, and decision-making. Our review of federal agencies' efforts to implement GPRA have shown that while it can be beneficial to periodically reassess and revise goals, it is also important that annual performance plans and reports provide clear information about the reasons for these changes when they occur. This information helps provide assurance that changes were intended to improve performance management rather than obfuscate weak performance; that is, that the changes were from developmental bias. Consistent with our findings, OMB's guidance to federal agencies on the submission of GPRA plans and reports states that goals should be periodically modified as necessary to reflect (1) changes in programs, (2) agency capability to collect and report information, and (3) the importance and usefulness of any goal. All three of these factors are valid reasons to change goals. However, the District's performance report does not indicate if any of these or other factors were a basis for the extensive revisions made to goals during fiscal year 2000. In addition, the report does not discuss steps taken to ensure that reported performance data were complete, that is, represented the entire fiscal year. For example, the Department of Parks and Recreation added a new goal to improve the safety, cleanliness, and accessibility of its facilities. However, it is not clear whether data on the District's efforts to address safety findings (within 48 hours) was collected for the entire fiscal year. According to an official responsible for coordinating the performance assessment, the District cannot ensure that the reported data represented the entire year's performance for any of the agencies; the official indicated one would have to go back and check with each individual agency to determine whether they were complete. The concerns we raise are consistent with problems identified by the District Office of the Inspector General in a report published in March 2001. The Inspector General conducted a review to, in part, verify the data supporting the reported achievements regarding the fiscal year 2000 performance contracts and the Mayor's Scorecard goals. One of the Inspector General's conclusions was that agencies did not maintain records and other supporting documentation for the accomplishments they reported and that the Office of the City Administrator did not provide sufficient guidance to address that problem. In response to the Inspector General's finding, the Office of the City Administrator said it recognized the need for standard procedures, and it plans to issue performance review guidelines by the end of the summer 2001. Finally, regarding initial goals that were not carried over to the final set used to assess fiscal year 2000 performance, many are identified in the performance report as having been achieved. However, none of these goals had performance data provided for them. Therefore, the specific performance level at which these goals were met cannot be determined, that is, whether successful performance was marginal or otherwise. For example, the District had a goal of improving the response time for all legal services provided by the Office of the Corporation Counsel. The District's report indicates that the goal was achieved, but because no data were provided, it is impossible to know precisely how and to what extent the agency improved its response time. The District's performance report does not cover all significant District activities as required; thus, the performance report does not provide a comprehensive snapshot of the District government's performance. For example, the report does not cover the performance of the District's public schools, which account for more than 15 percent of the District's budget. More important, the schools are responsible for a core local government function--providing primary education. The District's performance report acknowledges this critical gap in coverage and says that subsequent reports beginning with the fiscal year 2001 report will more fully meet the statutory requirements. The District's fiscal year 2000 Performance Accountability Report improved in two areas of compliance compared to last year's report. First, the report provides the titles of program managers and their supervisors. The performance report is to include the title of the District of Columbia management employee most directly responsible for the achievement of each goal and the title of the employee's immediate supervisor or superior. The District's performance report provides the information for the final goals and goals contained in the Mayor's Scorecard. This is an improvement over last year's report, which contained no such information. Second, the performance report also includes information concerning court orders assigned to the government of the District of Columbia during the year and the steps taken by the government to comply with such orders. Specifically, the District's performance report provides the status for each of the 12 court orders by describing and identifying whether or not they were in effect in fiscal year 2000 and fiscal year 2001. For example, in the case of Joy Evans v. DC, the court required the District to improve the habilitation, care, and treatment for mentally handicapped residents. The report indicates that this court order was in effect in fiscal year 2000 and will continue to be in effect in fiscal year 2001. The report also provides information on the actions taken to comply with the orders. For example, in the case of Twelve John Does v. DC, the report clearly identifies the actions taken to address issues at the District's Central Detention Facility. The report states that cell doors are being repaired, ventilation systems are being replaced, environmental matters are being corrected, and additional staff are being added to address security needs. In addition, the report states that the facility is scheduled to close on or before December 31, 2001. The information provided by the District on court orders is an improvement over last year when, due to an oversight in compiling its fiscal year 1999 performance report, the District failed to report on any of the applicable court orders. The District's fiscal year 2000 performance report is an improvement over the previous year's in that it meets some of the statutory requirements that the previous report did not. However, the extensive changes that the District made to its fiscal year 2000 performance goals during the fiscal year undermine the usefulness of the resulting report because the District did not include critical information needed by Congress and other stakeholders. Such information, identifying how, when, and why specific goals were altered and the decision-making and accountability implications of those changes, is important to Congress and others so that they can have confidence in the validity and completeness of the reported performance data. In addition, the report does not cover all significant activities of the District government. Sustained progress is needed to address the critical performance and other management challenges that the District faces. The District recognizes the shortcomings with its performance management efforts and has stated a commitment to addressing them. The effective implementation of the various initiatives underway in the District is vital to the success of the District's efforts to create a more focused, results- oriented approach to management and decision-making--an approach that is based on clear goals, sound performance and cost information, and a budget process that uses this information in allocating resources. To further strengthen the District's performance management process and provide more useful information to its citizens and Congress, we recommend that the Mayor of the District of Columbia: Accelerate efforts to settle upon a set of results-oriented goals that are more consistently reflected in its various planning, reporting, and accountability efforts. Provide specific information in its performance reports for each goal that changed, including a description of how, when, and why the change occurred. In addition, the District should identify the impact of the change on the performance assessment itself, including data collection and measurement for the reporting period. Include in each year's accountability report the performance of all significant activities of the District. On May 31, 2001, we received e-mail comments on our draft report on behalf of the Deputy Mayor/City Administrator. He stated that overall, he concurred with our findings, appreciated the context in which they were presented, and acknowledged that additional work is needed to make the District's performance management system serve the needs of its citizens and Congress. The Deputy Mayor acknowledged that the extent of changes and the lack of discussion in the performance report about why specific goals were changed hinder comparison of the District's performance against its initial goals. In addition, he said that using the goals that resulted from the development of agency strategic plans was more representative of the District's performance during fiscal year 2000 than the initial goals. We agree with both of these points. Our central point, however, was that given the timing and extent of goal revision, and the absence of a discussion about those changes, the usefulness of the report for understanding performance as measured against the final goals, is limited. The Deputy Mayor said that the information we reported on the timing of the final set of agency goals appears to exaggerate the amount of time that agency goals were in a state of flux--leading to the impression that all of the District's goals were changing until June 2000. We report that goals for the critical agencies were finalized by March 2000 and that goals for other (noncritical) agencies were revised at other times; the District could not specify when these goals were finalized. It could only suggest that 30 to 40 percent of these agencies' goals were revised. However, we revised our report to reflect that although some goals were finalized earlier, they were not submitted to Congress until June 2000. In response to our recommendation that the District accelerate efforts to settle upon a consistent set of goals, the Deputy Mayor said that the District anticipates consolidating its goals during the fiscal year 2003 planning, budgeting, and reporting cycle. He further stated that goals for fiscal years 2001 and 2002 are likely to change as the District updates its agency-specific and citywide strategic plans in the summer of 2001. As we note in this report, it can be beneficial to periodically reassess and revise goals. However, it is critical that the District makes every effort to accelerate the process of settling upon its final goals early in a fiscal year to ensure that the performance assessment and report are meaningful. The Deputy Mayor concurs with our recommendation that specific information should be provided in the District's performance reports for each goal that changed. The Deputy Mayor also concurs with our recommendation to include in each year's accountability report the performance of all significant activities of the District. He said that the District will seek to expand the coverage of its fiscal year 2001 report to more fully comply with its mandated reporting requirements. He also stated that although the District cannot compel independent agencies not under the authority of the Mayor (including the D.C. Public Schools) to report on performance, it plans to work with them in developing performance information. We are sending copies of this report to the Mayor of the District of Columbia. Copies will be made available to others upon request. Key contributors to this report were Kathy Cunningham, Chad Holmes, Boris Kachura, and Bill Reinsberg. Please contact me or Mr. Kachura on (202) 512-6806 if you have any questions on the material in this report. The first copy of each GAO report is free. Additional copies of reports are $2 each. A check or money order should be made out to the Superintendent of Documents. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Orders by visiting: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders by phone: (202) 512-6000 fax: (202) 512-6061 TDD (202) 512-2537 Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. 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The District of Columbia's fiscal year 2000 performance report is an improvement in that it meets some of the statutory requirements that the previous year's report did not. However, the extensive changes that the District made to its fiscal year 2000 performance goals during the fiscal year undermine the report's usefulness because the District did not include critical information needed by Congress and other stakeholders. Such information, identifying how, when, and why specific goals were altered and the decision-making and accountability implications of those changes, is important to Congress and others so that they can have confidence in the validity and completeness of the reported performance data. Also, the report does not cover all significant activities of the District government. Sustained progress is needed to address the critical performance and other management challenges that the District faces. The District recognizes the shortcomings with its performance management efforts and has stated a commitment to addressing them. The effective implementation of the various initiatives underway in the District is vital to the success of the District's efforts to create a more focused, results-oriented approach to management and decision-making--an approach that is based on clear goals, sound performance and cost information, and a budget process that uses this information in allocating resources.
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In fiscal year 1998, authorized federal funding for drug treatment programs totaled approximately $3.2 billion, with the Department of Health and Human Services (HHS) receiving $1.7 billion. SAMHSA received more than half ($944 million) of HHS' drug treatment budget. Approximately 80 percent of SAMHSA's total budget, which includes funding for both drug prevention and treatment, is distributed to states through block grants and formula grant programs. SAMHSA also supports activities that include the administration of NHSDA and STNAP. Since 1972, NHSDA has provided national estimates of the prevalence of drug use in the U.S. civilian noninstitutionalized population aged 12 years and older. NHSDA, administered by OAS, is an ongoing survey of members of households in the United States on their use of illicit drugs, their nonmedical use of prescription drugs, and their use of alcohol and tobacco products. NHSDA is currently the nation's most comprehensive survey of drug use. It provides annual information on national trends in the use of substances and data that can be used to analyze patterns of substance use, the size and characteristics of substance use among various special populations, and the populations needing treatment. To determine the need for treatment, SAMHSA combines various measures of symptoms, problems, and patterns of use included in the NHSDA questionnaire. This information is intended to approximate clinical criteria for drug dependence and to supplement it with other data that indicate treatment need. SAMHSA calculates the number of persons in need of treatment as those who met at least one of the following criteria in the past year: dependence on any illicit drug; heavy drug use (that is, used heroin at least once, used marijuana daily, or frequent use of some other drug); injection drug use of heroin, cocaine, or stimulants; or received drug abuse treatment. States are also expected to develop estimates of treatment need on a statewide and local basis and report them to CSAT in their block grant applications and through STNAP. Under the 1992 Alcohol, Drug Abuse, and Mental Health Administration Reorganization Act (P.L. 102-321), states are required to use needs assessment data in developing and implementing the plans submitted as part of their block grant applications. Specifically, states are required to develop and report in their block grant applications estimates of treatment need by age, sex, and race or ethnicity for the state as a whole and for each substate planning area. Through STNAP, CSAT provides states with funding and technical assistance to conduct studies to determine the need and demand for substance abuse treatment in relation to the states' resource availability. The Government Performance and Results Act was enacted in 1993 in part to improve performance measurement by federal agencies. It requires agencies to set goals, measure performance, and report on their accomplishments. The legislation was enacted to increase program effectiveness and public accountability by having federal agencies focus on results and service quality. SAMHSA developed several performance goals as part of HHS' 1999 Results Act performance plan. These goals include providing estimates of the prevalence of substance abuse in each of the 50 states and the District of Columbia and increasing to 80 percent the proportion of block grant applications that include needs assessment data developed from STNAP. Although OAS relies primarily on NHSDA to make national estimates of drug abuse treatment need for the general population and certain subpopulations, the survey has limitations that can lead to underestimates of treatment need. These limitations include the survey's use of self-reported data; the exclusion of certain high-risk populations; and a sample for some subpopulations, such as pregnant women, that is too small to produce valid estimates. To improve the accuracy of its estimates, OAS adjusted the NHSDA data with data from other sources that are presumed to be more reliable. For example, with this adjustment, OAS estimates of treatment need in 1995 increased by nearly a third. This adjusted estimate, however, is still considered conservative and does not provide subpopulation estimates of treatment need. OAS plans to expand NHSDA (effective in 1999) to further improve the accuracy of drug use and treatment need estimates. Several limitations of NHSDA can result in underestimates of treatment need for the general population and subpopulations, such as pregnant women. HHS and the Institute of Medicine have reported on a number of these limitations. For example, NHSDA data are based on self-reports, which rely on respondents' truth and memory. Although NHSDA procedures were designed to encourage honesty and improve recall, SAMHSA and others assume some degree of underreporting; however, SAMHSA has not adjusted NHSDA data to account for this limitation. NHSDA also excludes certain populations at high risk for drug use. NHSDA was initially designed as a survey to determine the rate of drug use within U.S. households and as such has excluded drug use by individuals in institutional settings, such as prisons and residential treatment centers, and by those with no permanent residence, including homeless and transient people. As a result, the survey does not include population groups known to have high rates of drug use who are often not in a household environment. In addition, NHSDA's sample size for some subpopulations is too small to produce valid estimates. For example, for the 1994-95 survey, OAS reported that the number of women who were pregnant at the time of the interview--770--and reported using illicit drugs--28--was too small to make certain estimates. To partially account for NHSDA's undercoverage of hard-to-reach populations and underreporting of drug use by survey respondents, OAS developed a methodology that substitutes data from sources presumed to be more reliable. Using this methodology, OAS estimated that in 1995, about 8.9 million people in the United States needed drug abuse treatment compared with the 6.9 million estimate--including 2.6 million women--derived solely from NHSDA. While this adjustment results in a treatment need estimate that is about 29 percent higher than the estimate based on only NHSDA data, it still results in conservative estimates of treatment need. In addition, while OAS' ratio adjustment was designed to improve the national estimate of treatment need for the general population, it does not estimate treatment need for women and other subpopulations. The ratio adjustment replaces some NHSDA data with information from Uniform Crime Reports (UCR) and the National Drug and Alcohol Treatment Unit Survey (NDATUS), now known as the Uniform Facility Data Set, to estimate treatment need. These data sources provide information on the number of persons arrested, treated for drugs, or both and are presumed to be more reliable. UCR, compiled by the Federal Bureau of Investigation from administrative records of police departments nationally, contains information on arrests and is adjusted for nonresponse and underreporting. NDATUS is a 1-day annual census of all specialty drug abuse and alcohol treatment units nationally. To obtain data on persons treated for drug abuse, approximately 11,800 specialty providers are surveyed on the number and type of patients treated and services received. This adjustment categorizes NHSDA responses into one of four arrest and treatment groups: arrested and treated, treated but not arrested, arrested but not treated, and not arrested and not treated. According to OAS, the NHSDA estimates appear to significantly underestimate the number in each of the first three categories; to compensate, numbers from UCR and NDATUS are substituted for NHSDA data. The methodology provides only a partial adjustment because any underreporting in the not arrested and not treated category is not affected by the adjustment. Also, the adjustment is still subject to NHSDA limitations. Therefore, according to OAS, the ratio-adjusted estimates represent improved, but conservative estimates of treatment need. OAS is expanding NHSDA's sample from 18,000 to 70,000 respondents each year and modifying its methodology to obtain state-level data and better national and subpopulation prevalence estimates. The expanded NHSDA will capture larger samples of youth, racial and ethnic minorities, pregnant women, and hard core drug users, which are expected to result in more accurate subpopulation estimates. The expanded NHSDA is expected to produce comparable state estimates of need annually; however, the sample sizes are not large enough to produce annual substate estimates. According to SAMHSA officials, it will be possible to generate substate estimates by combining multiple years of NHSDA data. While the additional data are expected to result in more precise estimates, treatment need will likely still be underestimated due to the survey's continued exclusion of certain high-risk populations and reliance on self-reported data. A major component of the expansion is to allow for estimates for each of the 50 states and the District of Columbia. A regression model OAS developed in 1996 uses NHSDA sample data and local area indicators to estimate state-level drug prevalence and treatment need. However, because of sample size requirements, this methodology only generated estimates for 26 states and 25 metropolitan areas. (See the appendix for a description of this methodology and individual state and metropolitan area estimates.) The expanded sample uses a similar methodology but has been designed to produce direct estimates for the 8 most populous states with smaller samples drawn for the other 42 states and the District of Columbia. The smaller samples will support model-based estimates that use information from the national sample, local indicators derived from the Census Bureau and other sources, and state samples. The method for collecting information and the content of the NHSDA questionnaire will also be modified under the expansion. Specifically, NHSDA will employ computer-assisted interviewing in 1999, which is expected to minimize respondent errors and partially increase the reliability of self-reporting by building in greater privacy for the respondent. The content of the questionnaire will also be augmented to obtain income and insurance data, national mental health statistics, data on treatment and prevention, and information on crime and other deviant behaviors. The projected annual cost for the expansion is $34 million. According to SAMHSA officials, the expanded NHSDA will help them identify states with serious drug abuse problems and help target technical assistance and discretionary funds. SAMHSA expects the expanded NHSDA to improve its prevalence estimates of drug abuse in the 50 states and the District of Columbia--one of the goals included in its 1999 performance plan. SAMHSA officials also said that the expanded NHSDA will provide data to monitor the performance of various federal and state agencies engaged in efforts to reduce the supply and demand of illicit drugs. For example, the expanded NHSDA is expected to allow for measurement of the national goal of reducing past month use of illicit drugs among 12- to 17-year-olds by 35 percent by the end of year 2002. Some experts question the additional cost associated with expanding NHSDA's sample size to provide state-level estimates. They state that less costly alternatives using modeling techniques that rely on currently available estimates, such as synthetic estimation, could achieve similar goals at a significantly reduced cost. However, SAMHSA officials believe that the approach used in the expanded NHSDA will result in more accurate estimates than those produced using a purely synthetic estimation methodology. They also pointed out that the methodology used for the expanded NHSDA has been tested and validated. However, SAMHSA officials and other experts believe that more validation is needed overall in the methods used to estimate drug abuse treatment need. SAMHSA collects state and local treatment need data through state block grant applications and state reports required under STNAP. Through STNAP, CSAT has provided financial and technical assistance to states to conduct needs assessments. However, while SAMHSA is overseeing state efforts to develop and report estimates of treatment need, not all states have produced such estimates. In addition, CSAT's monitoring and review of states' block grant reporting does not ensure the data are complete, accurate, and consistently reported. Our review of needs assessment information in states' fiscal year 1997 block grant applications found the data to be incomplete and of questionable quality. While data developed under STNAP have been used as a state resource and planning tool, the program has been limited in developing state in-house capacity and improving states' reporting in block grant applications, as intended. One of SAMHSA's goals is to increase the proportion of state block grant applications that include needs assessment data developed under STNAP. However, HHS' performance plan did not include any information on how SAMHSA will accomplish its goal of increasing state reporting or how it would improve the accuracy of the data reported by states. Further, SAMHSA's oversight of STNAP does not encourage coordination among CSAT staff providing oversight and technical assistance or strict monitoring of states' compliance with program requirements. More than $1 billion in block grant funds are distributed to states for planning, carrying out, and evaluating activities to prevent and treat substance abuse. States report, as part of their annual block grant applications, information on intended use of federal funds for drug treatment. They are asked to report information on populations, areas, and localities with the greatest need for treatment services and information on the state's capability to provide treatment. This information is collected to provide SAMHSA with information on how states are using block grant funds and assist states in identifying gaps in services and targeting resources. Although states are required by federal law to report needs assessment information in block grant applications, the data reported does not affect their block grant awards. Our review of needs assessment information in fiscal year 1997 block grant applications found the data to be incomplete, inaccurate, and inconsistently reported. According to SAMHSA, this is due, in part, to states' lack of sufficient data and resources to complete the extensive amount of data required in block grant applications. While some states have reported complete information, our review showed that about 25 percent (14 states) did not report on the total population needing treatment and about a third (18 states) did not report information on the total population seeking treatment. In addition, a number of states did not provide information on subpopulations. For example, about 25 percent of states did not report information on women needing treatment, and almost 60 percent did not report information on children and adolescents aged 17 and under needing treatment. We also found inaccuracies in the data reported by states. For example, the number of males and females under age 11 reported needing treatment in one state was greater than the state's entire population. Our review of 1997 applications also revealed inconsistencies in states' reporting of needs assessments, both within a state and across states. For example, some states' reporting of total women needing treatment on one of the forms in the application was inconsistent with the reporting of that same information--disagreggated by age, sex, and race or ethnicity--on another form in the application. States' reporting of information is also not consistent across states. States define need differently and employ different methods and databases to estimate need. Due to the lack of quality of needs assessment data reported in block grant applications, the data have limited use in determining gaps between needs and services available and assuring federal officials that federal funds are being used for the purposes intended. Under block grant regulations, states are required to submit the best available needs assessment data. According to agency officials, the phrase "best available" leaves the agency little basis on which to challenge the data submitted by states in block grant applications. While SAMHSA has not taken the initiative to ensure that accurate, complete, and consistent information is reported in the applications--nor has it validated state estimates or reviewed the methodologies used to develop them--SAMHSA officials expressed concerned about the quality of the data and are in the process of addressing these concerns. In 1992, CSAT developed STNAP to help states produce better estimates of treatment need and develop plans for use of treatment resources. Between 1992 and 1996, CSAT awarded STNAP contracts to 53 states and territories totaling $59 million. As of June 1998, 23 states and territories had been awarded new contracts, totaling approximately $24 million, to continue activities under a second round of contract awards. STNAP was designed to develop and maintain a data collection and analysis infrastructure to assist states in surveillance, planning, budgeting, and policy development. STNAP has three primary objectives: (1) assist states in better allocating treatment funds, (2) enhance and sustain states' in-house capabilities to assess need, and (3) improve states' reporting in block grant applications. The program has had limited success in meeting its objectives. According to some state officials, STNAP has been useful in helping states target resources and enhance service delivery. For example, New Jersey reported using prevalence estimates, developed from an STNAP contract, in its allocation formula for distributing alcohol treatment money to better reflect the distribution of need at the county level. Iowa reported using its results to allocate funds based on objective estimates of need, which helped them target outreach efforts that offer the most potential for success. Iowa officials also reported that they used STNAP data to redesign the state's approach for providing tailored outreach and treatment services for women. Data generated in New Mexico were reportedly used to initiate substance abuse recognition and counseling training in public health offices and create specialized counseling for health care providers to create smoking and alcohol cessation programs for pregnant women. However, states have been slow in developing in-house capacity to assess need--one of STNAP's objectives. According to CSAT, most states have been unable to develop sufficient capacity due to inadequate state-level resources and expertise and, as a result, have relied on outside consulting firms, local universities, or both. CSAT officials characterize these relationships as mixed and said that effective contracts with consultants and universities is dependent on the quality of state oversight. While contracts with consultants and universities can limit the development of in-house expertise and result in a lack of continuity and a sustained data infrastructure, they have allowed some states to establish and maintain a knowledge base and network. For example, while Texas and South Carolina used universities for data collection, they used in-house staff expertise for analyses and reporting. To further assist states in developing their in-house capacity to assess need, CSAT contracted with the National Technical Center (NTC) at Harvard Medical School to provide technical assistance. According to CSAT officials, states' reporting of results developed under STNAP in block grant applications--the third objective of the program--has not yet been fully realized because most states have not completed their planned data collection and analyses. As of February 1998, 19 states have contracts that have been completed or allowed to expire, with some work remaining on final reports. Although states were initially awarded 3-year contracts, most states received unfunded contract extensions and are taking, on average, 5 years to finish. SAMHSA requires states to incorporate needs assessments developed under STNAP in block grant applications, but SAMHSA has not enforced this requirement for those states that have completed their contracts. Although one of SAMHSA's performance goals is to increase to 80 percent the proportion of state applications that include STNAP needs assessment data, SAMHSA did not provide any information in the performance plan on how it will increase state reporting or verify the data reported by states in block grant applications. Individual state estimates developed under STNAP were also originally intended to be used as a basis for developing national estimates of need. However, this goal has been dropped by SAMHSA because of data incomparability across states. Specifically, while states are required to assess need for a core set of abused drugs using clinical definitions of dependence, states have overall flexibility in designing their studies. As a result, states employed different survey instruments and sample sizes that affect the resulting estimates' comparability. CSAT's oversight of STNAP has not ensured timely completion of the contract or compliance with some program reporting requirements. Of the 19 states that completed the contract, only 8 (42 percent) did so within the original 3-year time frame. According to a former state official, the complex data collection and analysis procedures and unrealistic expectations about response rates developed under CSAT's contract attributed to delays in contract completion. CSAT officials stated that the extended time necessary for states to complete the contract is an indication of a need for more program direction. States are also required to report findings to CSAT--through monthly, annual, and final reports--as part of their contracts and to report STNAP-collected data in block grant applications. Our review found that only 11 states have submitted final reports, and CSAT could only locate 6 of the 11 reports. Further, some states completed the project but did not report data in their block grant applications. CSAT has not consistently communicated STNAP objectives and requirements to states. Also, CSAT project officers acknowledge that their review of state contracts has been inconsistent and there is little coordination among them. Specifically, CSAT project officers responsible for STNAP oversight and state technical assistance have not coordinated their efforts or taken advantage of experiences and lessons learned from their involvement with different states. CSAT officials acknowledge that stricter monitoring of states' compliance with program requirements is needed. According to SAMHSA, some changes have been instituted to improve monitoring; however, specific plans of action to achieve these goals have not yet been fully developed. Reliable assessments of treatment need--at national, state, and local levels and for specific population groups--are an essential component to accurately target treatment services. While SAMHSA has efforts under way to improve its national estimates through the expansion of NHSDA, the survey is still likely to result in an underestimate of treatment need. Also, STNAP's goals to help states develop estimates of treatment need and improve state reporting of need data have not been fully accomplished. Even though states are required to provide estimates of treatment need as part of their block grant applications, not all states report this information and some of the data reported are inaccurate. SAMHSA recognizes the need to increase state reporting and has set a target for increasing the number of states that provide the information. It also recognizes that the overall quality of the data reported is problematic. However, SAMHSA has not indicated how it will increase state reporting or improve the quality of the data reported by states in block grant applications. In keeping with its goal of improving state reporting, we recommend that the Administrator of SAMHSA develop an action plan for how the agency will increase states' reporting of accurate, complete, and consistent treatment need data in block grant applications and include a summary of these actions in HHS' year 2000 performance plan. We provided copies of a draft of this report to SAMHSA and others for review. SAMHSA generally agreed with the report's findings and with the need for an action plan aimed at improving state reporting of treatment need data as we recommended. While SAMHSA recognized the need for an action plan, it stated that it would be inappropriate to include in a performance plan the level of detail required for an action plan. We did not intend to imply that the performance plan should include extensive detail; however, it should include a discussion of strategies the agency will use to achieve its goals. Accordingly, we modified our recommendation to clarify how action plan information should be reflected in the performance plan. SAMHSA also provided a number of technical comments, which we incorporated where appropriate. We also obtained comments from researchers and experts in the field who were knowledgeable about these issues and incorporated their comments where appropriate. We are sending copies of this report to the Secretary of HHS, the Administrator of SAMHSA, officials of state substance abuse agencies, appropriate congressional committees, and other interested parties. We will make copies available to others upon request. Please contact me at (202) 512-7119 or James O. McClyde, Assistant Director, at (202) 512-7152, if you or your staff have any questions. Other major contributors to this report were Ann Calvaresi Barr and Janina Johnson. In 1996, OAS developed models for estimating state-level treatment need that use regression analyses combining NHSDA data with local area indicators--such as drug-related arrests, alcohol-related death rates, and Census Bureau data--that were found to be associated with substance abuse. The models produce estimates that are a weighted average of an indirect synthetic regression estimate and a direct survey estimate. Therefore, the models require at least some NHSDA sample data for each area under consideration. A total of 26 states and 25 metropolitan areas met the sample size criteria (at least 300 interviews) required for estimation using these models. According to OAS, the analysis applies a consistent methodology across states; however, the estimates produced are subject to many of the limitations of NHSDA national estimates. OAS has developed state and selected metropolitan area estimates using this regression analysis for 1991 through 1993. (See tables 1 and 2.) According to an OAS official, OAS is developing state estimates using 1994 through 1996 NHSDA data. Number (in thousands) Anaheim-Santa Ana, Calif. Atlanta, Ga. Baltimore, Md. Boston, Mass. Chicago, Ill. Dallas, Tex. Denver, Colo. Detroit, Mich. El Paso, Tex. Houston, Tex. Los Angeles, Calif. Miami-Hialeah, Fla. Minneapolis-St. Paul, Minn. Nassau-Suffolk, N.Y. New York, N.Y. Newark, N.J. Oakland, Calif. Philadelphia, Pa. Phoenix, Ariz. San Antonio, Tex. San Bernardino, Calif. San Diego, Calif. St. Louis, Mo. Tampa-St. Petersburg, Fla. Washington, D.C. 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 need for drug abuse treatment, focusing on: (1) the Substance Abuse and Mental Health Services Administration's (SAMHSA) efforts to estimate drug abuse treatment need on a national basis, including estimates of subpopulations, and possible limitations of these efforts; and (2) state estimates of drug abuse treatment need. GAO noted that: (1) SAMHSA's national estimates of drug abuse treatment need are primarily derived from the agency's National Household Survey on Drug Abuse (NHSDA); (2) while NHSDA is the principal measure of the prevalence of illicit drug use in the United States, SAMHSA and others have recognized that certain survey limitations affect the accuracy of need estimates, which may result in an underestimate of treatment need; (3) NHSDA's reliance on self-reported data likely results in underreported drug use; (4) to compensate for these limitations, in 1996, SAMHSA developed a method for assessing treatment need that adjusts NHSDA prevalence data with other data sources, including crime reports and treatment facility data; (5) SAMHSA estimated that in 1995, about 8.9 million people in the United States needed treatment for an illicit drug, compared to its estimate of 6.9 million derived solely from NHSDA data; (6) beginning in 1999, SAMHSA will expand NHSDA to provide better national drug use estimates of subpopulations and to provide state estimates of prevalence and treatment need; (7) in any case, these adjustments will only partially correct NHSDA's limitations and are likely to still result in an underestimate of treatment need; (8) states use various methods to develop estimates of treatment need, which are used to help make planning and resource allocation decisions; (9) states are required to report these estimates in applications for federal block grant funds for substance abuse prevention and treatment; (10) GAO's review of fiscal year (FY) 1997 block grant applications show that not all states submitted such data, and of those that did, some submitted incomplete or inaccurate data; (11) according to SAMHSA, the incomplete and inaccurate data are due, in part, to states' lack of sufficient data and resources to complete block grant applications; (12) in response to prior concerns about the lack of state and substate estimates of treatment need, the State Treatment Needs Assessment Program (STNAP), administered by the Center for Substance Abuse Treatment (CSAT), was initiated in 1992; (13) under 3-year contracts with CSAT, states are provided financial and technical assistance for conducting needs assessments and developing estimates of treatment need to include in their block grant applications; and (14) SAMHSA has established the improvement of state STNAP needs assessment reporting as a goal in its FY 1999 performance plan.
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All employers must file their Form 941 returns quarterly, although some are to make employment tax deposit on differing schedules during a quarter. The form contains information concerning the tax deposits made for a quarter and is generally due by the end of the month after the close of the quarter. Until IRS receives and processes the Form 941 returns, it cannot match tax deposits reported on the returns with its records of deposits received. Once it matches this information, IRS notifies employers of any delinquencies using a written notice. This is the employers' first statutory notice of the delinquency. If the employer fails to respond to this first notice, IRS sends follow-up notices and may later contact the employer by phone or, eventually, make a personal visit. Although this entire process can take years for those employers who do not respond, under IRS' processing procedures, initial notices are sent within several weeks after IRS receives the Form 941 return. IRS provides a variety of outreach efforts to help employers understand how to meet their tax obligations, many of which are designed to explain requirements and to meet other needs of small business taxpayers. For example, IRS makes tax forms with instructions and publications that explain requirements available to taxpayers in a variety of formats including hard copy, CD-ROM, and electronic form on the Internet. In addition to conducting various workshops and seminars, many of which are tailored to the needs of small businesses, IRS also recently established a Web site specifically designed to address the needs of small business taxpayers. Beginning in September 2001, IRS' Web site allows employers nationwide to use the Internet to deposit employment taxes via the Electronic Federal Tax Payment System On-Line. Current IRS strategies and program plans call for providing more services to taxpayers, including employers, to prevent noncompliance. To that end, IRS has shifted its focus from addressing compliance issues after returns are filed to addressing them as early as possible, often through efforts to better educate taxpayers about their tax responsibilities and to improve forms, guidance, and other information available to taxpayers. This is consistent with IRS' strategic objectives to reduce taxpayer burden, uncertainty, and errors by clarifying tax law responsibilities and resolving issues early in the process. IRS believes that its efforts to reduce taxpayer burden will show significant progress over the next 2 years and will be further enhanced by its plans for long-term business systems modernization. To determine how long IRS takes to contact employers after an employment tax delinquency occurs, we analyzed the time between (1) the receipt of a quarterly Form 941 return and IRS' mailing of an initial delinquency notice, (2) when a Form 941 was due and IRS' mailing of a delinquency notice when the employer fails to file a Form 941, and (3) when the employers should have deposited employment taxes during a quarter and IRS' mailing of an initial delinquency notice. For all three situations, we interviewed cognizant officials from IRS' Small Business and Self-Employed Division (SB/SE), IRS' National Office, and various field offices, and we obtained related documentation. To determine the time between when a Form 941 return was due but not filed and IRS' mailing of initial delinquency notices and the time between when an employer fails to make a deposit during a quarter and IRS' mailing of a notice, we relied on the flowchart of IRS' processes and associated timeframes that we developed. We confirmed our summaries of IRS' processes and related timeframes necessary to notify employers of delinquencies with appropriate IRS officials at the National Office, Atlanta Service Center and the Martinsburg Computer Center. IRS did not have data in its BMF One Percent Sample File that we could use to estimate these timeframes. To determine the length of time between when IRS receives the Form 941 return and the issuance of the initial notice to the employer, we analyzed data extracted from IRS' Business Master File (BMF). The data we used in this time analysis was extracted from an IRS data file entitled the BMF One Percent Sample File. IRS uses this data file to perform its own analysis of BMF information and to verify system performance and output. IRS considers the results of analysis from the BMF One Percent Sample data to be valid and uses the data file to perform comparable analyses, however it does not use the data file to make estimates projectable to the entire BMF. In addition, because we did not have access to taxpayer data, we were not able to independently verify taxpayer information contained in the data file. IRS officials did not have programming resources available to extract a random sample of employment tax-related delinquencies from the BMF, thus IRS' BMF One Percent Sample File provided the best alternative for obtaining the data for the time analysis. In providing delinquent employment tax information for the time analysis, IRS extracted Form 941 return records and associated transaction date information from the BMF One Percent Sample File. After removing the employee identification numbers (EIN) from the file, IRS provided us with a file containing transaction date information for the delinquent Form 941 returns selected. The data used in the time analysis reflects taxpayer account information from the BMF as of September 2001. For tax years 1999 and 2000, over 66,000 account records were used in the analysis. About 25,000 records were eliminated from the time analysis because they were not posted to the BMF as normal Form 941 quarterly returns. We also developed flowcharts to describe IRS' processes and associated timeframes for initially contacting delinquent employers to further validate the BMF sample timeframe analysis; and verified the accuracy of the flowchart with IRS officials. we reviewed and analyzed statistical information related to employment taxes--including the number of Form 941 returns filed based on amounts paid to determine the frequency of deposits. We also reviewed and analyzed IRS employment tax-related collection policies and procedures, obtained relevant publications and instructions, and reviewed relevant IRS web pages and related reports. To identify IRS' current employment tax intervention programs and program evaluation efforts, we interviewed appropriate IRS officials within SB/SE and other operational groups who identified the following four intervention programs: Mentoring and Monitoring, Federal Tax Deposit (FTD) Soft Letter, ABC's of FTDs, and FTD Alert Program; and obtained and discussed pertinent program documentation including plans, progress reports, and schedules with IRS officials. To determine IRS' plans under modernization as they related to employment tax intervention and evaluation efforts, we interviewed and discussed with cognizant IRS officials IRS' business system modernization efforts; and obtained and reviewed relevant documentation including IRS' Strategic Plan (Fiscal Year 2000-2005), and 2000 Progress Report-IRS Business Systems Modernization Program . You expressed interest in the level of resources IRS uses to contact taxpayers with employment tax delinquencies. We researched this by interviewing IRS officials and reviewing past reports by IRS and us. On the basis of this work, we advised you that IRS' financial and data systems do not collect or produce such specific information. Currently, IRS cannot isolate the resources it uses to notify employers having employment tax delinquencies for specific form types such as the Form 941 return. As a result, you suggested that we not pursue the resource issue at this time. You also expressed interest in whether there are intervention programs and initiatives in use at other federal agencies or relevant nonfederal organizations that could serve as best practice models for IRS. We are not reporting on this topic because during our review of eight federal agencies and five state tax authorities we did not find any intervention programs or initiatives that could serve as best practice models. The primary reason for this is that many of the organizations under review had significantly different procedures than IRS for formally identifying a delinquency. For example, these organizations often have shorter collection cycles than IRS which enables them to notify delinquent parties in less time than IRS. IRS' collection cannot begin until after it receives the quarterly Form 941 returns. This review primarily focuses on IRS' intervention efforts as they relate to the initial notification of employment tax delinquencies. In addition, the review covers IRS' efforts to intervene with taxpayers in order to educate and inform them of their tax obligations and to expedite compliance. The review did not cover IRS' subsequent enforcement and collection activities such as contacting delinquent employers through IRS' Automated Collection System (ACS) or contacts made by IRS' collection representatives in the field. We performed our work from June 2000 through December 2001 in accordance with generally accepted government auditing standards. The time IRS takes to notify employers of deposit or return delinquencies and the amount of interest and penalty assessed is affected if employers fail to meet two major employment tax responsibilities. Employers must make periodic employment tax deposits during each quarter and file Form 941 returns by the last day of the month following the close of each calendar quarter. The periodic deposits made throughout the quarter are subsequently reported on the Form 941 returns. Filing these returns is crucial because IRS determines compliance by matching its accounting records of deposits made throughout the quarter with the deposit information reported on the return. Consequently, failure to file Form 941 returns necessitates additional IRS processing and can further delay employer notification of delinquencies thus increasing employers' interest and penalty charges. Based on IRS data and our discussions with IRS officials, we found the following: Our analysis of IRS' data containing delinquent employment tax accounts shows that IRS took an average of about 5 weeks from the date the Form 941 returns were filed to notify employers of a missed, late, or underpaid deposit. Based on our analysis of the steps IRS follows to detect and notify employers of a failure to file a 941 return, which we confirmed with IRS officials, we found that IRS normally takes from 14 to 28 weeks. During the first two quarters of the calendar year, individual return processing demands affect the time IRS takes to process these notices. Following a similar analysis confirmed by IRS, we found that when employers have delinquent deposits, IRS notification reaches most employers from 3 to 23 weeks from the due date of the delinquent deposit the exact time is primarily dependent upon when the deposit involved was due. From the employers' standpoint, the date of any missed or underpaid deposit is important because IRS computes interest and penalties from the date of the delinquent deposit. Our analysis of IRS' delinquent employment tax data indicates that once IRS receives Form 941 returns, it takes about 5 weeks to notify employers of employment tax delinquencies. The time required to notify employers is contingent on the date that employers file their Form 941 returns and the ensuing IRS processing workload. Employers generally have until the end of the month after the quarter closes to file their returns. During calendar years 1999 and 2000, IRS received and processed about 5.7 million Form 941 returns per quarter. Using the 4th quarter of calendar year 2000 as an example, IRS service centers began receiving and processing Form 941 returns in mid-January 2001, although most were received in the surge of returns arriving at IRS service centers following the due date of January 31. Figure 1 shows the multiple steps involved in IRS' weekly batch processing of the Form 941 returns and the related time frames for each step of processing 4th quarter returns. When employers fail to file Form 941 returns, IRS takes longer to notify them because it first processes timely-filed returns before it begins to identify missing returns. In that regard, we found that IRS normally takes from 14 to 28 weeks after the due date to notify employers of their failure to file a Form 941 return. IRS officials concurred with that timeframe for IRS to notify employers of these delinquencies. IRS officials added that the time variance is due to differences of tax quarter workloads with the heaviest workload falling in the first two quarters of the calendar year. In response to increased workloads, IRS prioritizes the processing of taxpayer notices by notifying employers with the greatest liability and with repeated return delinquencies first. These notices do not assess penalties or interest against the employers but rather advise them that IRS has not received the Form 941 returns and ask the employers for explanations. For employers who also have failed to deposit taxes due, interest and penalties continue to accrue until they become compliant. Although the receipt date of the Form 941 returns is key to IRS' processing and employer notification, interest and late penalties accrue from the date of the employers' delinquent deposits. Accordingly, delinquent deposits from early in a quarter will result in higher interest and penalties than delinquent deposits from later in the quarter. Employers owing smaller amounts of employment taxes are allowed to make less frequent deposits. As shown in table 1, in calendar year 2000, about 71 percent of employers owed employment taxes of $50,000 or less annually and could make deposits on a quarterly or monthly basis. Conversely, 29 percent of employers owing more than $50,000 annually had to deposit employment taxes more frequently. Employers who are in this deposit category made 95 percent of the total employment tax deposits. Beginning January 1, 2001, more employers were allowed to pay employment taxes quarterly as opposed to monthly or more frequently. From that date, employers owing less than $2,500 (rather than $1,000) could pay when they file their returns, reducing employer burden and decreasing the chance for delinquencies and other mistakes. Had this change been in effect during calendar year 2000, the number of employers depositing quarterly would have increased from about 19 percent to about 37 percent. Because these employers pay when they file their Form 941 return, interest and penalties have less time to accrue before they receive a notice concerning delinquencies. Therefore, these depositors would be subject to less interest and penalty than employers who fail to make deposits during the quarter before the form 941 return is due. A reduction in the frequency of required deposits can decrease the amount of time that interest and penalties can accrue. However, for employers who are required to deposit employment taxes more frequently than either monthly or quarterly, missing or underpaying their first payment in the quarter allows interest and penalties to accumulate for a longer period of time. Table 2 shows the interest and penalty consequences for a hypothetical monthly depositor and a depositor who pays more frequently during the quarter, both of whom miss their first and last deposit due in the 4th quarter. The table demonstrates the increased interest and penalty amounts for missing deposits early in the quarter for both types of depositors. It also shows that the impact is greater on depositors who pay more frequently, as their deposits are due earlier in the quarter. If employers fail to respond to the initial notice of a delinquency, interest and penalty amounts can pyramid. For example, if employers fail to deposit the correct amount within 10 days of receiving the notice, the penalty increases from 10 to 15 percent of the delinquent deposit. Interest continues to accrue until the deposit is paid. Generally, the late pay penalty can accumulate up to 25 percent of the delinquent amount. Had these employers also failed to file Form 941 returns, they would be subject to an additional penalty of 4.5 percent per month, which could also compound to 22.5 percent. IRS has developed several specific programs designed to intervene with employers to help prevent employment tax delinquencies and reduce the pyramiding of additional tax, interest, and penalty charges. IRS officials identified four programs that specifically seek to intervene with employers to prevent or reduce delinquent employment taxes: (1) Mentoring and and (4) FTD Alert. While the first three programs are in various stages of completion, the fourth is an established program that is undergoing changes intended to improve it. To evaluate the effectiveness of these programs, IRS planned to compare compliance rates of test and control groups and to use customer surveys and focus groups. IRS has experienced difficulties in completing performance evaluations for such reasons as time delays in obtaining the data required to determine the programs' effectiveness. The programs and IRS' evaluations of them are discussed below. Mentoring and Monitoring Program. This pilot program is IRS' largest recent effort to prevent employment tax delinquencies among new employers. Under the program new employers are given special educational materials at the time they receive their employer identification number and some of these new employers receive follow-up monitoring. IRS conducted this pilot program for more than 13,000 new employers in four states (Kansas, New Mexico, Oklahoma, and Texas). The 2-year program began in August 1999, and IRS expects to complete its evaluation in early 2002. IRS sent the special educational materials to two separate test groups of new employers and offered additional services to the ones IRS considered at higher risk of noncompliance. Every employer in the test groups received educational materials that included a videotape, entitled "ABC's of FTDs;" a workbook concerning FTD requirements; and other information to help new employers. Nearly 7,000 employers in test groups considered higher risk were offered additional monitoring services, which included assigning a Small Business Representative to act as a mentor to to answer questions, provide forms and publications, and remind employers of deposit and filing requirements during monthly monitoring calls. Of the 1,716 employers that initially accepted IRS' offer of these services, about 800 remained in this part of the program at the time it was discontinued in July 2001. IRS planned a two-pronged evaluation, using customer surveys for the test group and a comprehensive evaluation of compliance data comparing the test and control groups. In contrast to the special materials and services provided the test groups, employers in the control groups received only the letter IRS normally sends when new employers request an EIN. IRS planned to mail customer surveys to test employers in fiscal year 2000, directly after the educational materials were delivered and the monitoring services were under way. These surveys were designed to obtain the views of test employers on the program materials and other services, but the surveys were never conducted because of a lack of funding. As of October 2001, IRS had awarded a contract to have focus groups conducted in place of the customer surveys; however, the focus groups were not expected to be completed until mid-January 2002. The delays between the time that materials and services were received and the time focus groups were to provide their opinions could affect the usefulness of their responses. IRS also plans to evaluate this program by comparing the compliance rate of various risk categories of employees among the test group employers and with corresponding categories within the control groups. Although it has been delayed, IRS plans to begin evaluating the compliance data for the test and control groups when they become available in late fall 2001. The data will include such information as deposits made, returns filed, delinquencies and resulting notices sent, and FTD penalties assessed. The analysis of these data, along with a cost-benefit summary will be included in the business analysis case that will be prepared to support recommendations about the program's future. In an August 2001 audit report on the results of its review of the Mentoring and Monitoring pilot, the Treasury Inspector General for Tax Administration (TIGTA) reported that the program should help new business taxpayers with their federal employment tax responsibilities. TIGTA expressed concerns, however, about the program's sampling methodology, cost-effectiveness, and level of management oversight and raised certain questions about expanding it nationwide at this time. Among other things, TIGTA recommended that SB/SE Division management should provide oversight for the remainder of the project, including the planned business case analysis of the compliance results achieved under the pilot. FTD Soft Letter. This pilot program seeks to improve employers' voluntary compliance through intervening much earlier than IRS' long- standing FTD Alert Program allows. The FTD Soft Letter was sent only to employers required to make deposits more frequently than monthly and who appeared to have underpaid tax deposits during the quarter. Before their quarterly Form 941 return was due, IRS sent these employers a letter advising them of the potential discrepancy. IRS sent letters only to those employers identified nationwide who had historically been compliant but were assessed an FTD penalty in one of the past four quarters and paid it but appeared to have made smaller than expected tax deposits in the current quarter. In October 2000, IRS sent a soft letter to 1,806 employers nationwide who met the criteria. The letter included a phone number they could call to request assistance, and a tear-off portion to notify IRS if they were no longer in business or had no employees. In response, 339 of the 1,806 informed IRS that their businesses were defunct or no longer had employees. IRS originally planned to evaluate the compliance of the test group against a control group of similar employers that had not received a soft letter. IRS was to begin the evaluation in January 2001, with the final report due by July 2002. As of October 2001, IRS had not begun the evaluation, and no decision had been made on whether or not to proceed with it. According to IRS officials, evaluation plans were disrupted as the result of IRS' ongoing reorganization. In that regard, responsibility for the soft letter program was transferred from the now defunct Small Business Lab to the SB/SE Division, established in October 2000. Although the program was transferred in early 2001, IRS did not assign formal program responsibility to the division until August 2001. In October 2001, newly assigned program officials decided to evaluate the program to determine the program's effectiveness and possible future use. Current plans call for a report based on four quarters of compliance data to be completed by April 2002. The ABC's of FTDs. This 2-hour class on FTD, including videotape entitled "The ABC's of FTDs" and a course workbook, was designed to assist employers who experienced difficulties in staying compliant with their federal tax deposit obligations. Employers were invited to attend classes that were held in September 1998, February 1999, and June 1999 in the Seattle metropolitan area. If employers attended the class and remained compliant for two subsequent quarters, IRS excused them from paying up to three tax quarters of the FTD penalties they had previously incurred. However, only 28 of 315 employers invited to attend classes actually did so, according to IRS data. To analyze the pilot program, IRS established both a test group consisting of those employers who attended the educational classes and received the materials and various control groups that did not. IRS had planned to track payment compliance for these groups through June 2001, but instead concluded the evaluation in June 2000, using compliance data from five quarters. IRS' evaluation of the program revealed that employers made more FTD deposits and filed fewer delinquent returns after attending the classes; however, IRS could not attribute these improvements to class attendance. The evaluation made several other points regarding the program: Low class attendance diminished the impact of the program. The test group tended to make more deposits than the control groups, even before they were invited to attend. The employers who attended chose to come and, therefore, may have been more motivated to be compliant. The evaluation made several recommendations that have apparently not been acted upon. The educational videotape and course workbook also were used, however, as part of the Mentoring and Monitoring program materials in an effort not only to educate employers but also to further evaluate the materials' effectiveness. As previously discussed, however, the evaluation of this program, expected to be completed in mid-January 2002, is to be based on input from employer focus groups held more than a year after IRS' originally planned customer surveys. FTD Alert. IRS' FTD Alert program has existed since 1972 and is intended to improve overall employment tax compliance. The current program's selection criteria identifies only those depositors who owe more than $50,000 per year, have delinquencies resulting in FTD penalties in recent quarters, and appear to have underpaid the current quarter. If the employers have FTD penalties in the four previous quarters, IRS Revenue Officers are required to contact them to help them understand deposit requirements and the cost and consequences of not depositing as required. Although the program provides IRS with an opportunity to intervene with these employers concerning their delinquencies, several aspects of the program have been criticized. IRS is in the early stages of addressing these weaknesses, as discussed below. Over the years, both our reports and IRS internal audit reports have been critical of several aspects of the FTD Alert Program. For example, we stated in a 1991 report that IRS lacked a tracking system to determine the result of contacts made with delinquent employers, and IRS echoed this same criticism in TIGTA's 1998 internal report. Without such a system, IRS cannot assess the effectiveness of the program. The IRS National Office FTD analyst responsible for the program stated that a meeting is planned in January 2002 to begin development of such a system. As recommended by TIGTA in 1998, IRS' research organization has been exploring ways to improve the FTD Alert Program that may result in current selection criteria being replaced. According to IRS, earlier efforts have demonstrated some success in identifying the most collectible delinquencies and prioritizing the workload to target those delinquencies. IRS' effort to improve employer selection criteria was to be completed in mid-2000, but its information systems staff was unable to provide the required data when it was originally requested owing to competing priorities. IRS requires the data to develop algorithms based on the current selection criteria that will, if successful, allow IRS to identify and prioritize employers nationwide who are at risk of becoming delinquent. According to IRS officials, the needed data were to be delivered by August 30, 2001. IRS plans to test the algorithms during the winter, using test and control groups, and evaluate them by spring 2002. By the end of June 2002, IRS plans to prepare a final report detailing the methodology, findings, and recommendations regarding the selection criteria. IRS' ongoing modernization efforts do not currently include any programs specifically designed to improve IRS' notification to employers with tax delinquencies. However, sweeping organizational changes and information system improvements may in the future reduce taxpayer burden and improve compliance. These changes are not expected to be completed in the near term but will be phased in over the next several years. Information system improvements may help IRS to notify employers of tax delinquencies more quickly and effectively, but implementation is not expected to begin for business returns, such as the Form 941 returns, until at least 2005. IRS is making major organizational changes designed to reduce taxpayer burden and improve services. For example, it has created four new operating divisions tailored to more effectively meet the needs of specific groups of taxpayers. Similarly, IRS is also designating that only certain service centers will receive and process business tax returns and related tax information, and officials believe this specialization could eventually expedite processing. As part of its strategic plan, IRS will emphasize providing assistance to taxpayers before tax returns are filed and providing earlier intervention with taxpayers when problems arise. One of IRS' four new operating divisions is dedicated to serving the needs of small business and self- employed taxpayers, while another serves large and mid-sized businesses. According to IRS' plans, taxpayers in each of these divisions should benefit from IRS' handling of all their respective tax issues within a single organization. IRS management and staff are expected to provide more tailored products and services to help their respective taxpayer segments comply with applicable tax laws. Although the new divisions officially began operations on October 1, 2000, they are still developing processes and operating procedures. The SB/SE Division, in particular, is not yet fully staffed. In addition, IRS is shifting its workload to allow certain locations to specialize in processing business returns. For example, instead of all 10 IRS service centers processing Form 941 returns, IRS plans to have only two service centers doing this work. IRS does not expect this change to be completed until at least 2002. Furthermore, according to an IRS modernization official, the specialized services centers are not expected to initially impact the current IRS processing time for Form 941 returns, although the processing time could be reduced as IRS gains experience in these two service centers. Under the new structure, IRS also plans to place an increased emphasis on prefiling activities, such as taxpayer education, outreach, and earlier intervention with taxpayers. This new emphasis on preventing problems instead of fixing them after the fact is one of modernization's key changes intended to help employers avoid, or at least minimize, tax delinquencies. Central to IRS' achieving its modernization vision is replacing the multiple, antiquated information systems it currently uses to maintain taxpayer accounts and to provide customer service with a single, integrated system known as the Customer Account Data Engine (CADE). IRS expects CADE to greatly improve its customer service capabilities by providing immediate updates of taxpayer accounts and expediting its processing of returns and payments. For example, CADE is to replace the current once- a-week processing schedule that adds to the time IRS takes to notify employers of employment tax delinquencies, with daily processing that could reduce the time for this notification. These changes, however, are not expected to be available for business processes for many years. IRS plans to incrementally phase CADE in, beginning with the simplest individual tax accounts. Accordingly, IRS will begin by processing the form 1040EZ using the CADE system and progress eventually to using the system for more complex forms, such as business returns. As a result, IRS' plans do not call for CADE to begin processing Form 941 returns until at least 2005. Early notification can help businesses that have failed to pay in a timely manner their full employment tax liability or to timely file a Form 941 quarterly return by minimizing the penalty and interest charges associated with delinquent deposits and tax returns. Until IRS improves its computer systems, there does not appear to be much that can be done to further decrease the time that IRS' processes require for routinely notifying all businesses of their employment tax delinquencies. In the interim, IRS has developed three new programs designed to prevent or reduce employment tax delinquencies by speeding up or enhancing the notification to certain groups of businesses. However, IRS has not successfully followed through on its plans to evaluate these programs. It has also experienced delays in evaluating its efforts to improve its long- standing FTD Alert program. We believe IRS needs to properly evaluate whether the benefits to be derived from expansion of the pilot programs and retention of the FTD Alert program justify the program costs. We recommend that the IRS Commissioner require the SB/SE Commissioner to develop and execute a plan for evaluating the effectiveness of the employment tax early intervention programs. The plan should address the resources needed to evaluate the interventions, ensure the clear and timely assignment of responsibility for the evaluations, and include milestones for completing the efforts. On January 3, 2002, we received written comments on a draft of this report from the Commissioner of Internal Revenue (see app.I). The Commissioner said that IRS has researched measurement practices used by public and private sector institutions in conjunction with SB/SE's efforts to develop plans for outreach measurement. The Commissioner also said that the intervention programs we identified have already provided valuable insight into the needs of small business taxpayers. He agreed with our recommendation and said that the Commissioner, SB/SE, will review each of the programs in our report and determine the extent of evaluation required. Further, when the review is completed, each SB/SE office responsible for a program will evaluate the specific intervention effort and make recommendations for implementation. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to the Commissioner of Internal Revenue and other interested parties. We will also make copies available to others upon request. If you have any questions regarding this report, please contact me or Joseph E. Jozefczyk at (202) 512-9110. The major contributors to this report were Marvin McGill, Linda Standau, Tom Bloom, and Grace Coleman.
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Employers are required to withhold amounts from their employees' salary to cover individual federal income tax, Social Security, and Medicare taxes; match the amounts for Social Security and Medicare taxes; and deposit these amounts with the U.S. Treasury. In fiscal year 2000, the Internal Revenue Service (IRS) collected $1.3 trillion in this manner. Most employers withhold and deposit these taxes as required; however, the amount of unpaid employment taxes, penalty, and interest has grown significantly. IRS data show that in 1997, 1998, 1999, and 2000, delinquent employers owed about $3.2, $3.5, $4.4, and $5 billion, respectively, in unpaid employment taxes, penalties, and interest. The time IRS takes to notify employers of delinquent payment of employment taxes varies. On average, IRS takes about five weeks to initially notify employers regarding employment tax delinquencies after the Form 941 return is received. When employers fail to file Form 941 returns, IRS normally takes from 14 to 28 weeks to notify them of this delinquency. Aside from its usual efforts to educate and inform taxpayers of their responsibilities, IRS has four programs to prevent or reduce employers' tax delinquencies. Two of these programs were designed to achieve early contact with employers, and two were designed to identify employers with existing, multiple employment tax delinquencies and help them to return to compliance. To evaluate the effectiveness of these programs and to support informed judgments about whether to adopt new ones, IRS planned to compare compliance rates of test and control groups and to use customer surveys and focus groups. IRS' efforts to evaluate these programs are being adversely affected by, among other things, delays in obtaining reliable data. IRS officials did not identify any specific programs to improve employment tax intervention under IRS' ongoing effort to modernize its organizational structure, management processes, and information technology systems. However, certain aspects of its modernization effort have some future potential to improve intervention.
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EURATOM, a group of 15 western European countries in the European Union, was established in 1957 to promote and facilitate the growth of nuclear industries through the research and development of nuclear energy in the Union, to ensure a supply of nuclear materials, and to foster progress in the peaceful uses of nuclear energy. Figure 1 shows EURATOM's 15 member countries. The U.S.-EURATOM agreement was signed in 1958. According to a State Department official, the agreement has served as the basis for substantial and historic peaceful nuclear cooperation and trade between the United States and the EURATOM countries for nearly 40 years. Negotiations are currently under way to try to secure a new U.S.-EURATOM agreement before the present agreement expires at the end of 1995. According to a State Department official, if a new agreement is not concluded prior to the expiration date, significant nuclear commerce between the two parties must be suspended. According to a Department of Energy (DOE) official, the existing U.S.-EURATOM agreement prohibits the EURATOM countries from using U.S.-origin nuclear materials or equipment for nuclear weapons or for other military purposes, and it requires that EURATOM safeguards or controls be applied to U.S.-origin materials in a EURATOM country. These safeguards are augmented by full-scope International Atomic Energy Agency safeguards in the EURATOM states that do not have nuclear weapons. The EURATOM nations are required to obtain U.S. consent before transferring U.S.-origin nuclear materials or equipment to a third party outside of the European Union. However, the agreement does not contain any other U.S. consent rights and therefore differs significantly from other U.S. nuclear cooperation agreements, which contain U.S. consent rights over the use (including reprocessing) of U.S.-origin nuclear materials. The largest amount of U.S. nuclear materials exported to EURATOM and Japan during the last 15 years was made up of depleted, natural, and enriched uranium. Table 1 shows the total amount of U.S. nuclear materials exported to EURATOM from 1980 through 1994 that are controlled by the agreement. Table 2 summarizes the total amount of nuclear materials exported to Japan during the same period. (App. I contains detailed information on U.S. exports to EURATOM and Japan.) Japan uses enriched and natural uranium as fuel for nuclear power reactors. The used or spent fuel is transferred to EURATOM for reprocessing, which chemically separates the depleted uranium and plutonium. Enriched uranium, totaling 4,542,383 kgs, constituted the largest amount of U.S.-origin nuclear materials transferred from Japan to EURATOM. From 1980 through 1994, Japan transferred to EURATOM between 115,651 kgs and 404,935 kgs annually of enriched uranium. Japan also exported about 37,187 kgs of plutonium to EURATOM during this period. Table 3 summarizes the total amount of U.S.-origin nuclear materials Japan transferred to EURATOM during the period. (App. I contains information on the amount of U.S.-origin nuclear materials Japan transferred to EURATOM annually during this period.) According to NRC officials, no nuclear power reactors were exported to EURATOM or Japan from 1980 through 1994. However, NRC issued licenses for the export of four major reactor components for use in research and nuclear power reactors to EURATOM in 1986, 1991, and 1992. In addition, nuclear reactor equipment and components have been exported by the United States to Japan annually between 1980 and 1994 under NRC's general licenses. We obtained the dollar values of the uranium and plutonium exports from the Department of Commerce's National Trade Data Base. However, this data base excludes the cost of loading the merchandise aboard the exporting carrier and also excludes freight, insurance, and any other charges or transportation costs beyond the port of exportation. The reliability of the data also depends on the accuracy of reporting by shippers on their export declarations. According to the Department of Commerce's data base, the dollar value of U.S. exports to EURATOM countries of uranium (natural, enriched, and depleted) and plutonium in 1989 through August 1994 was about $1.1 billion. The value of these U.S. exports to Japan for the same period was about $4 billion. (App. II contains detailed information on the dollar value of U.S. exports to EURATOM and Japan.) According to U.S. nuclear industry officials, the services related to exported nuclear materials, such as uranium mining, enrichment, and fuel fabrication, should be factored into the value of U.S. nuclear exports. In the past, DOE provided uranium enrichment services to EURATOM and Japan. In 1993, uranium enrichment services were transferred to the U.S. Enrichment Corporation (USEC), a government-owned corporation, which was created to operate the U.S.-owned uranium enrichment plants and to market enrichment services. We contacted DOE and USEC to obtain the amount billed to EURATOM and Japan for enrichment services from 1989 through 1994. According to information from DOE, EURATOM was billed a total of $167,527,507 for enrichment services in fiscal years 1989 through 1993. Japan was billed a total of $1,593,567,205 for the same period. DOE's billings under EURATOM and Japanese contracts, by fiscal year (FY), are shown in figure 2. The amounts billed by DOE included the cost of enriching the uranium delivered to the enrichment plant and of packaging and handling the services at the enrichment plant. The enriched uranium is delivered to the customer at the enrichment plant, but its cost does not include any subsequent services, such as fabricating reactor fuel assemblies. According to USEC, the amount billed under Japanese contracts for the period from 1989 through 1994 was $350 million to $400 million per year. Industry representatives anticipate that if the U.S.-EURATOM agreement is allowed to expire, EURATOM and Japan would turn to other suppliers of nuclear products and services outside the United States. U.S. participation in the European nuclear markets would be greatly reduced. In addition, because Japan also exports U.S.-origin spent fuel to EURATOM for reprocessing, Japan would be less likely to purchase uranium fuel sources from the United States in the future. The absence of a U.S.-EURATOM agreement would prohibit Japan from transferring this U.S.-origin spent fuel for reprocessing in any EURATOM country. Furthermore, these industry representatives point out that part of nuclear commerce includes relationships with the customers and the guarantee of reliable supply and services to them. A break in any of these ties, such as a failure to renew the U.S.-EURATOM agreement, would weaken the U.S. nuclear industry substantially, because the industry needs both its domestic and foreign markets. U.S. nuclear industry representatives stated that the nuclear industry is a market industry that can exist only in a global environment. According to USEC officials, if the U.S.-EURATOM agreement for cooperation expires, USEC's future enrichment services would be seriously affected. Specifically, existing contracts with EURATOM, worth approximately $160 million, could be terminated. Other contracts, valued at approximately $470 million, would be in jeopardy. Another $1.8 billion in potential new business from EURATOM and Japan might be lost. According to a nuclear industry representative, the U.S. share of the European nuclear industry market currently is about $100 million and may reach $300 million annually after the year 2000. In addition, Japan currently is the largest single foreign purchaser from U.S. suppliers of nuclear power systems equipment, materials, and services. In the next 5 years, according to industry officials, anticipated U.S. participation in construction, equipment, start-up services, spare parts, and fuel for 10 nuclear power plants in Japan is expected to amount to about $500 million to $800 million annually throughout the plants' lives. During May 1995, we provided drafts of this report to officials in NRC and the Departments of Commerce, Energy, and State to obtain their comments on the facts presented in this report. In general, these officials agreed with the facts presented in the draft report. NRC officials, including the Director, Division of Nonproliferation, Exports, and Multilateral Relations, Office of International Programs, made several editorial suggestions to improve the clarity of the information and noted that they had some questions about the Department of Commerce's National Trade Data Bank information presented in table II.8 in appendix II. In particular, NRC officials stated that they were puzzled by the reported plutonium sales to some of the listed countries, especially Denmark, Greece, and Portugal. According to the NRC officials, these countries have very small nuclear research programs and no nuclear power programs; thus, they doubt that these countries have in fact imported plutonium from the United States. In addition, NRC stated that NRC's export licensing data base shows no licenses for exports to Greece or Portugal, one small (0.005 kg) plutonium export case for Denmark, and only three plutonium export cases for Spain. However, NRC noted that U.S.-supplied nuclear materials to any country within EURATOM can be freely transferred within EURATOM without prior notification to, or approval by, the United States. Thus, according to NRC, it is possible, although not considered likely, that U.S.-supplied plutonium has gone to the countries in question and has been reported to the Department of Commerce's National Trade Data Bank system without appearing in NRC's export licensing records. (The text of NRC's comments appears in app. III.) In their review of the draft, Department of Commerce officials, including officials at the Bureau of Export Administration, acknowledged the differences in NRC's export licensing data base, DOE's data base, and the National Trade Data Bank's data. However, neither the Department of Commerce nor DOE has determined why these data bases differ. According to the Department of Commerce officials, they may, at a later date, examine why these differences exist. According to a DOE official, DOE is attempting to determine why the differences exist between the data bases. It was not within the scope of our review to determine why the various data bases differ. (The text of the Department of Commerce's comments appears in app. IV.) DOE officials, including the Acting Director, Office of Nonproliferation and National Security, reviewed the draft and had no comments on the facts presented. DOE stated that it is confident that a new U.S.-EURATOM agreement will be achieved before the December 31, 1995, expiration of the current agreement. (The text of the Department of Energy's comments appears in app. V.) The State Department's Foreign Affairs Officer, Office of Nuclear Energy Affairs, Bureau of Political-Military Affairs, reviewed the draft and had no comments on the facts presented in the report. (The text of the Department of State's comments appears in app. VI.) To determine what nuclear commerce items are subject to export controls under the U.S.-EURATOM agreement, we interviewed officials in NRC's Office of International Programs, Division of Nonproliferation, Exports, and Multilateral Relations. We reviewed the export license requirements covered by 10 C.F.R. part 110. In addition, we obtained data on NRC's approved licenses for U.S. nuclear material exports to EURATOM and Japan for 1980 through 1994 (the period selected was judgmental) from NRC's Office of International Programs, Division of Nonproliferation, Exports, and Multilateral Relations. To determine what data bases contain data on nuclear material exports, we interviewed officials at DOE's Energy Information Administration (EIA); the Program Manager for DOE's Nuclear Materials Management and Safeguards System (NMMSS), and NMMSS officials at the Oak Ridge Operations Office in Oak Ridge, Tennessee; officials at the Customs EXODUS Command Center; NRC officials in the Office of International Programs, Division of Nonproliferation, Exports, and Multilateral Relations; and U.S. nuclear industry representatives, including the Nuclear Energy Institute, General Electric, Energy Resources International, Inc., and Edlow International, Inc. On the basis of these discussions, we found that the best data available on U.S. nuclear exports are contained in the NMMSS data base, which accounts for U.S. nuclear material exports controlled under the U.S.-EURATOM agreement. The information on exported nuclear materials and U.S.-origin materials transferred from Japan to EURATOM in the NMMSS data base is collected from DOE and NRC forms. These forms are filled out by parties involved in the shipment of these materials. According to an NMMSS official, the data in the NMMSS data base reflect the amounts of nuclear materials that were actually exported or transferred from one country to another country. To obtain the DOE/NMMSS export information, we worked with DOE/NMMSS staff at the Oak Ridge Operations Office in Oak Ridge, Tennessee, and NRC officials in the Office of International Programs, Division of Nonproliferation, Exports, and Multilateral Relations. However, we did not independently verify the accuracy of these data. To determine the dollar value of uranium and plutonium exports to EURATOM countries and Japan, we obtained available data (1989-Aug. 1994) from the Department of Commerce's National Trade Data Bank. The accuracy of these data depends largely on the accuracy of the reporting by shippers in their export declarations. We did not independently verify the accuracy and completeness of the data. We recognize that DOE's and the Department of Commerce's data show different quantities of nuclear material exports. Both DOE and Department of Commerce officials also acknowledge the differences in these data. However, it was not within the scope of this review to determine why the various data bases differ. According to a DOE official, DOE is attempting to determine why the two data bases differ. According to Department of Commerce officials, they may, at a later date, examine why these differences exist. We interviewed nuclear industry officials, NRC officials, DOE/NMMSS staff, EIA officials, and officials from the State Department to obtain information on the nuclear commerce subject to the U.S.-EURATOM agreement. We also interviewed USEC officials to obtain available data (FYs 1989-93) on the value of enrichment services provided by DOE and USEC. Our work was performed between September 1994 and May 1995 in accordance with generally accepted government auditing standards. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 15 days from the date of this letter. At that time, we will send copies to the Secretaries of Commerce, Energy, and State and to the Chairman, Nuclear Regulatory Commission. We will make copies available to others on request. Please call me at (202) 512-3841 if you or your staff have any questions. Major contributors to this report are listed in appendix VI. Figure I.1 shows that U.S. exports of natural uranium to EURATOM ranged from 4,324 kilograms (kgs) to 1,811,478 kgs annually during 1980 through 1994. The total amount of natural uranium exported was 11,886,101 kgs during this period. Natural uranium is used for fuel in some nuclear power reactors, but it is usually enriched or used for blending to produce low-enriched fuel. Figure I.2 shows that U.S. exports of enriched uranium to EURATOM ranged from 197,186 kgs to 615,415 kgs annually during 1980 through 1994. The total amount of enriched uranium exported was 6,049,307 kgs during this period. Enriched uranium contains 0.711 percent of the isotope uranium-235. Examples of enriched uranium's typical uses include fuel for commercial power reactors (low-enriched uranium) and research reactor fuel (highly enriched uranium). Figure I.3 shows that U.S. exports to EURATOM of depleted uranium, with nuclear end use, ranged from 3,086 kgs to 10,286,236 kgs annually during 1980 through 1994. A total of 14,649,985 kgs were exported during this period. Depleted uranium also contains uranium-235 but contains less than 0.711 percent of this isotope. Depleted uranium is very dense and can be used in high-impact projectiles and as a shielding material against radiation. Figure I.4 shows that U.S. exports of thorium to EURATOM ranged from 0 to 2,517 kgs annually during 1980 through 1994. A total of 3,188 kgs of thorium were exported during this period. According to a DOE official, thorium is used for research and development purposes. Figure I.5 shows that U.S. exports of uranium-233 to EURATOM ranged from 0 to 26 grams annually during 1980 through 1994. A total of 62 grams of uranium-233 were exported during this period. According to the NRC, this uranium-233 was for use as standard samples in laboratory analyses and tests. Figure I.6 shows that U.S. exports of plutonium to EURATOM ranged from 0 to 32,307 grams, or 32.3 kgs, annually during 1980 through 1994. A total of 32,793 grams, or 32.8 kgs, were exported during this period. According to DOE, the plutonium category in the NMMSS includes all plutonium that contains less than 20 percent of the plutonium-242 isotope. This category may also include the isotopes plutonium-239, -240 and -241. Plutonium in this category has research uses. Figure I.7 shows that U.S. exports of plutonium-242 to EURATOM ranged from 0 to 41 grams annually during 1980 through 1994. A total of 94 grams were exported during this period. This category includes all plutonium that has greater than 20 percent of plutonium-242. According to NRC, plutonium-242 is used for research purposes in calibrating equipment, such as mass spectrometers used in research institutes. Figure I.8 shows that U.S. exports of plutonium-238 to EURATOM ranged from 0 to 83 grams annually during 1980 through 1994. A total of 99 grams of plutonium-238 were exported during this period. According to DOE and NRC, plutonium-238 can be used for research and thermionic heating sources. Figure I.9 shows that U.S. exports of enriched uranium to Japan ranged from 331,067 kgs to 823,421 kgs annually during 1980 through 1994. A total of 10,031,810 kgs were exported during this period. Figure I.10 shows that U.S. exports of natural uranium to Japan ranged from 1 kg to 301,883 kgs annually during 1980 through 1994. A total of 917,621 kilograms of natural uranium were exported during this period. Figure I.11 shows that U.S. exports of depleted uranium to Japan ranged from 0 to 7,502 kgs annually during 1980 through 1994. A total of 7,937 kgs of depleted uranium were exported during this period. Figure I.12 shows that U.S. exports of thorium to Japan ranged from 0 to 475 kgs annually during 1980 through 1994. A total of 2,705 kgs were exported during this period. Figure I.13 shows that U.S. exports of uranium-233 to Japan ranged from 0 to 20 grams annually during 1980 through 1994. A total of 56 grams were exported during this period. Figure I.14 shows that U.S. exports of plutonium to Japan ranged from 0 to 1,949 grams, or 1.95 kgs, annually during 1980 through 1994. The total amount of plutonium exported during this period was 2,420 grams, or 2.42 kgs. These exports, like the exports to EURATOM, are used as laboratory standards and for research purposes, according to NRC. Figure I.15 shows that U.S. exports of plutonium-242 to Japan ranged from 0 to 3 grams annually, during 1980 through 1994. A total of 7 grams were exported during this period. Like EURATOM, Japan uses plutonium-242 as laboratory standards and for research purposes. Figure I.16 shows that U.S. exports of plutonium-238 to Japan ranged from 0 to 15 grams annually during 1980 through 1994. A total of 19 grams were exported during this period. Figure I.17 shows that U.S.-origin enriched uranium transferred from Japan to EURATOM ranged from 115,651 kgs to 404,935 kgs annually during 1980 through 1994. Japan transferred a total of 4,542,383 kgs of U.S.-origin enriched uranium to EURATOM during this period. Figure I.18 shows that U.S.-origin depleted uranium transferred from Japan to EURATOM ranged from 0 to 23,822 kgs annually during 1980 through 1994. A total of 98,178 kgs were exported during this period. Figure I.19 shows that U.S.-origin plutonium transferred from Japan to EURATOM ranged from 780 kgs to 3,433 kgs annually during 1980 through 1994. A total of 37,187 kgs were exported by Japan to EURATOM during this period. We obtained the dollar values for uranium and plutonium exports from the Department of Commerce's National Trade Data Bank. According to the Department of Commerce, the data bank was established by the Omnibus Trade and Competitiveness Act of 1988 to provide "reasonable public access" to an Export Promotion data system and an International Economic data system from 15 federal agencies. The export data bank contains statistics on the values of U.S. exports measured at the U.S. port of export. The value of a nuclear export item (material or component) is based on the transaction price, including inland freight, insurance, and the other charges incurred in placing the freight alongside the carrier at the U.S. port of export. The value excludes the cost of loading the merchandise aboard the exporting carrier and also excludes freight, insurance, and any other charges or transportation costs beyond the port of export. These statistics, however, do not always reflect the value as defined above, as exporters sometimes find it difficult to assign a value in accordance with this definition. The extent to which the statistics reflect this state depends largely on the accuracy of reporting by shippers on their export declarations. We used information from the export data bank to identify the total value and quantities for the commodities uranium and plutonium shipped by the United States to EURATOM countries and Japan. The data bank information covered the period for calendar years 1989 through August 1994. Tables II.1 through II.11 show the dollar values and amounts of uranium and plutonium exports to EURATOM countries, and tables II.9 through II.11 show the U.S. dollar values and amounts of U.S. exports to Japan. Bernice Steinhart, Associate Director, Energy and Science Issues Gene Aloise, Assistant Director Mary Alice A. Hayward, Evaluator-in-Charge Thomas J. Flaherty, Senior Evaluator Mario Zavala, Senior Evaluator Duane G. Fitzgerald, Nuclear Engineer The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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Pursuant to a congressional request, GAO provided information on the United States-European Atomic Energy Community (EURATOM) agreement, focusing on the: (1) amount of U.S. nuclear exports to EURATOM and Japan and U.S.-origin nuclear materials transferred from Japan to EURATOM; (2) value of U.S. nuclear exports to EURATOM and Japan; and (3) nuclear industry's views on the potential impact on nuclear commerce if the U.S.-EURATOM agreement is not renewed. GAO found that: (1) from 1980 through 1994, the United States exported about 32.6 million kilograms (kgs) of nuclear materials to EURATOM and 11 million kgs to Japan, and Japan transferred about 4.7 million kgs of U.S.-origin nuclear materials to EURATOM for reprocessing; (2) various forms of uranium constituted the majority of the nuclear material exports and enriched uranium constituted the majority of the U.S.-origin material transferred to EURATOM; (3) Japan also transferred about 37,187 kgs of U.S.-origin plutonium to EURATOM from 1980 through 1994; (4) no nuclear power reactors were exported to EURATOM or Japan during this period, but reactor equipment and components were exported to EURATOM and Japan under general license agreements; (5) U.S. nuclear materials exported from 1989 through August 1994 were worth about $1.1 billion for EURATOM countries and $4 billion for Japan; (6) for fiscal years 1989 through 1993, U.S. enrichment services worth $168 million and $1.6 billion were charged to EURATOM and Japan, respectively; (7) the U.S. nuclear industry believes that if the U.S.-EURATOM agreement expires, EURATOM and Japan would seek other non-U.S. suppliers of nuclear materials and services and the industry would be substantially weakened; and (8) the expiration of the agreement could seriously affect the future of the U.S. Enrichment Corporation's uranium enrichment services, since it would jeopardize $630 million in current contracts and $1.8 billion in potential new contracts.
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In its April 2013 report to Congress, in response to the National Defense Authorization Act for Fiscal Year 2013 requirement that DOD provide a cost-benefit analysis and a risk-based assessment of the Aerospace Control Alert mission as it relates to expected future changes to the budget and force structure of such mission,report on any new analyses because, according to DOD officials, DOD was not weighing competing Aerospace Control Alert basing location alternatives in response to any future budget or force structure changes. DOD reported on its previous analyses that consisted of (1) three risk assessments DOD conducted to support the 2012 decision that determined which two alert basing locations could be reduced with the least amount of risk and (2) cost savings estimates DOD developed after making the 2012 decision to take two alert basing locations (one in Duluth, Minnesota, and the other in Langley, Virginia) off 24-hour alert status. DOD did not conduct or In our prior reports on the Aerospace Control Alert mission, we stated that GAO's risk-based management framework noted that risk assessments should contain three key elements: an analysis of threat, an estimation of vulnerability, and an identification of consequences. Following a decision by DOD that two alert basing locations should be taken off 24- hour alert status, three risk assessments were conducted to support the 2012 decision of which two locations, once removed from 24-hour alert status, would have the least amount of increase in risk to the overall Aerospace Control Alert mission. DOD's April 2013 report provided a summary of the final results of these three risk assessments. These risk assessments were performed by NORAD, the Office of the Secretary of Defense Office of Cost Assessment and Program Evaluation, and the Continental U.S. NORAD Region, which included consideration of threat, vulnerability, and consequence. All three of these assessments came to similar conclusions regarding which of the two alert locations would cause the least increase in risk if taken off of 24-hour alert status. NORAD's risk assessment analysis was based on quantitative modeling of fighter basing and, in our February 2013 report, we noted that NORAD had improved its risk analysis by changing some of the assumptions used We also discussed the to address vulnerability and consequence.separate analysis conducted by the Office of Cost Assessment and Program Evaluation, which similarly relied on modeling to aid its evaluation of risk. Finally, in our February 2013 report, we described the analysis resulting from a panel of subject matter experts convened by Continental U.S. NORAD Region, which reached conclusions consistent with NORAD and the Cost Assessment and Program Evaluation modeling. NORAD officials stressed to us that there was an increase in risk that resulted from removing two basing locations from 24-hour alert status, but the risk assessments informed decision making as to which two bases removal would have the least increase in risk. According to DOD officials, no additional risk analysis was conducted following these three studies. According to DOD officials, DOD does not expect to make future changes to the budget and force structure of the mission beyond the decision already made to remove two sites from 24-hour alert status. In addition, the April 2013 DOD report notes that any further reductions in 24-hour alert sites would affect cross-border operations with Canada as well as mission accomplishment. Regarding the cost savings estimate, DOD's April 2013 report states that removing the 24-hour alert status from the Duluth and Langley alert basing locations would result in an estimated savings of over $73 million over the fiscal year 2013-17 time period. The report states that these estimated cost savings are primarily from shifting personnel from full-time to part-time status at the two sites no longer on 24-hour alert status. We reported on these same cost savings estimates in February 2013 and noted that the cost savings were estimated by the Air Force after the decision was made to eliminate alert basing locations at Duluth, Minnesota, and Langley, Virginia, from 24-hour alert status. DOD has reported Air Force cost information for the Aerospace Control Alert mission in its budget displays but has not yet reported the comprehensive cost of the mission. Standards for Internal Control in the Federal Government notes that financial information is needed for periodic external reporting and, on a day-to-day basis, to make operating decisions, monitor performance, and allocate resources. Pertinent cost information should be identified, captured, and distributed in a form and time frame that permits people to perform their duties efficiently. Accurate and timely reporting of operational and financial data can assist program managers in determining whether they are meeting their agencies' plans and meeting their goals for accountability for effective and efficient use of resources. Without comprehensive cost information, decision-makers may not know what resources are allocated and used in support of the Aerospace Control Alert mission. Pub. L. No. 110-417, SS 354 (2008). weak internal controls limited DOD's ability to accurately identify Air Sovereignty Alert mission expenditures. In addition, according to Air National Guard officials, not all National Guard Bureau costs are included in total Aerospace Control Alert mission costs. For example, the Air Force calculates the costs for each basing location based on formulas that do not consider the base's location and the unit's home station. However, according to Air National Guard officials, the actual costs of each basing location can vary depending on a number of factors, such as whether the personnel at the location are Air National Guard or active duty Air Force personnel or whether the assigned unit is home-based or a detachment unit--temporarily relocated from their usual duty station. The Air Force budget justification displays submitted for fiscal years 2010-14 include personnel costs for Air Force, Air National Guard, and Air Force Reserve personnel, but do not include costs, such as military personnel costs, that other military services have in conjunction with the Aerospace Control Alert mission. In addition to the 2009 requirement, the National Defense Authorization Act for Fiscal Year 2013 requires that DOD provide a consolidated budget justification display that fully identifies the Aerospace Control Alert budget for each of the military services and encompasses all programs and activities of the Aerospace Control Alert mission for each of the following: (1) procurement; (2) operations and maintenance; (3) research, development, testing, and evaluation; and (4) military construction. However, the act does not require any additional military personnel cost reporting. DOD has not yet developed a consolidated budget display in response to this new requirement. However, according to DOD officials, such a display is being developed for inclusion with the department's fiscal year 2015 budget submission to include the four budget categories specifically identified by the act. As a result, DOD's consolidated budget display for the fiscal year 2015 budget submission may not include military personnel costs associated with the other services, particularly the Army. The consolidated budget displays required by the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 and the National Defense Authorization Act for Fiscal Year 2013 should help provide Congress and senior DOD decision makers with a more complete picture of Aerospace Control Alert mission costs. However, in addition to Air Force, Air National Guard, and Air Force Reserve personnel costs, personnel costs from the other DOD components also support the mission--including the Army and the Army National Guard personnel providing ground-based air defense capabilities in support of the mission. Unless this additional information is included in DOD's revised budget display, DOD decision makers will not have comprehensive cost information to make fully informed resource allocation decisions to support the Aerospace Control Alert mission. The Aerospace Control Alert mission is critical to defending U.S. airspace. Once completed, the budget justification displays required by the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 and the National Defense Authorization Act for Fiscal Year 2013 should aid in the identification of many program and activity costs for each of the military services associated with the Aerospace Control Alert mission. A comprehensive identification and reporting of all costs associated with the mission, including all military personnel costs, could aid DOD in exercising effective management of this mission and its associated resources. Comprehensive reporting of all costs of the mission would also provide the Congress with a fuller accounting of these costs to aid in its oversight of the mission. As DOD expands its cost reporting in the consolidated budget justification displays as required by section 354 of the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 and section 352 of the National Defense Authorization Act for Fiscal Year 2013, we recommend that the Secretary of Defense direct the Under Secretary of Defense (Comptroller) and responsible DOD organizations, as appropriate, to ensure that all Aerospace Control Alert program and activity costs for each of the military services are captured, including military personnel costs of the Army and Army National Guard. In written comments on a draft of this report, DOD concurred with our recommendation to ensure that all Aerospace Control Alert program and activity costs for each of the military services are captured, including those of the Army and Army National Guard. DOD stated that the Office of the Secretary of Defense (Comptroller) will include these costs in its Fiscal Year 2015 budget submission. DOD's written comments are reprinted in their entirety in appendix I. We are sending copies of this report to the Secretaries of Defense and Homeland Security; the Commanders of NORAD, U.S. Northern Command, and U.S. Pacific Command; the Secretaries of the Army and of the Air Force; the Commandant of the Coast Guard; the Chief of the National Guard Bureau; and the Director of the Office of Management and Budget. In addition, this report will be available at no charge on our website at http://www.gao.gov. If you or your staff members 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 key 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, key contributors to this report were Mark A. Pross, Assistant Director; Adam Anguiano; Brent Helt; Mae Jones; Jeff Tessin; and Michael Willems.
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To protect U.S. airspace, DOD performs the Aerospace Control Alert mission, which includes military forces arrayed in a rapid response posture to conduct both air sovereignty and air defense operations against airborne threats over the United States and Canada. The National Defense Authorization Act for Fiscal Year 2013 required that the Secretary of Defense submit a report to Congress that provides a cost-benefit analysis and risk-based assessment of the Aerospace Control Alert mission as it relates to expected future changes to the budget and force structure of the mission. The act also requires that GAO review DOD's report and submit any findings to the congressional defense committees. In response to this mandate, GAO examined (1) DOD's April 2013 reporting of a risk-based assessment and cost-benefit analysis of the Aerospace Control Alert mission as they relate to expected future changes to the budget and force structure of that mission and (2) the extent to which DOD has reported the total cost of the Aerospace Control Alert mission. GAO reviewed DOD's April 2013 report to Congress and Aerospace Control Alert budget justification displays, and interviewed knowledgeable DOD officials. In its April 2013 report to Congress, the Department of Defense (DOD) did not provide any new analyses, but provided the results of previous analyses related to the Aerospace Control Alert mission because, according to DOD officials, DOD was not expecting any future changes to the budget or force structure of the mission, including consideration of any basing location alternatives. DOD's April 2013 report summarized the results of three risk assessments that were conducted to support DOD's 2012 decision on which two alert basing locations could be removed from 24-hour alert status with the least amount of risk. The North American Aerospace Defense Command (NORAD), the Office of the Secretary of Defense Office of Cost Assessment and Program Evaluation, and the Continental U.S. NORAD Region performed these assessments and all concluded that, given the 2012 DOD decision that two alert basing locations would be removed from 24-hour alert status, the removal of the locations at Duluth, Minnesota, and Langley, Virginia, would provide the least increase in risk. DOD's April 2013 report also summarized a cost savings estimate developed after the decision to remove these basing locations from 24-hour alert status. Along with the submission of DOD's budget requests for fiscal years 2010-14, the Air Force reported cost information for components of the Aerospace Control Alert mission in budget displays required by the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009, but DOD did not report the comprehensive cost of the Aerospace Control Alert mission. Standards for Internal Control in the Federal Government notes that financial information is needed for periodic external reporting and, on a day-to-day basis, to make operating decisions, monitor performance, and allocate resources. The Air Force provided budget displays containing information related to Air Force and Air National Guard military personnel costs, flying hours, and certain other costs along with DOD's budget justification materials for fiscal years 2010-14. However, DOD did not report other military service costs associated with the Aerospace Control Alert mission. The National Defense Authorization Act for Fiscal Year 2013 now requires, in addition to the Air Force cost information required by the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009, that DOD provide a consolidated budget justification display that fully identifies the Aerospace Control Alert budget for each of the military services and encompasses all programs and activities of the Aerospace Control Alert mission for each of the following: procurement; operations and maintenance; research, development, testing, and evaluation; and military construction. According to DOD officials, such a display is being developed for inclusion with the fiscal year 2015 budget submission. These consolidated budget displays should help provide a more complete picture of Aerospace Control Alert mission costs. However, other military personnel costs, including those associated with the Army and the Army National Guard personnel providing ground-based air defense capabilities, support the mission as well. Inclusion of this information, in addition to the information required in the budget justification displays, could provide decision makers with more comprehensive cost information to make fully informed resource allocation decisions to support the Aerospace Control Alert mission. GAO recommends that DOD, as it expands its cost reporting in response to current reporting requirements, ensure that all personnel costs related to the Aerospace Control Alert mission, including those of the Army and Army National Guard, are included in DOD's budget displays. DOD concurred with GAO's recommendation.
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In our past work on performance management, we have identified the alignment of individual performance expectations with organizational goals as a key practice for effective performance management systems. Having a performance management system that creates a "line of sight" showing how unit and individual performance can contribute to overall organizational goals helps individuals understand the connection between their daily activities and the organization's success. According to OPM, agency systems do not yet place sufficient emphasis on achieving measurable results. OPM has said that the criterion for alignment with organizational results is often the hardest of the certification criteria for agencies to meet. While many agencies are doing a good job of clarifying the alignment of executive performance plans with agency mission and goals, some of the plans often still fall short of identifying the measures used to determine whether the results are achieved, according to OPM. This challenge of explicitly linking senior executive expectations to results-oriented organizational goals is consistent with findings from our past work on performance management. To help hold senior executives accountable for organizational results, beginning in 2007, OPM required agencies to demonstrate that at least 60 percent of each senior executive's performance plan is focused on achieving results and has clear measures associated with those results to show whether the goals have been achieved in order to receive certification of their SES appraisal systems. The selected agencies in our review have designed their appraisal systems to address OPM's requirement of aligning individual expectations with organizational goals. For example, in setting expectations for the individual performance plans, DOE requires the senior executives and supervisors to identify three to five key performance requirements with metrics that the executive must accomplish in order for the agency to achieve its strategic goals. Weighted at 60 percent of the summary rating, the performance requirements are to be specific to the executive's position and described in terms of specific results with clear, credible measures (e.g., quality, quantity, timeliness, cost-effectiveness) of performance, rather than activities. For each performance requirement, the executive is to identify the applicable strategic goal in the performance plan. To ensure that agencies are implementing their policies for alignment of performance expectations with organizational goals, OPM requires agencies as part of their certification submissions to provide a sample of executive performance plans, the strategic plan or other organizational performance documents for establishing alignment, and a description of the appraisal system outlining the linkage of executive performance with organizational goals. Further, OPM requires agencies to consider organizational performance in appraising senior executive performance to receive certification of their SES appraisal systems. According to OPM and OMB officials, the main sources of organizational performance that agencies use are the performance and accountability reports (PAR) and Program Assessment Rating Tool (PART) summaries, which capture agencywide as well as program- or office-specific performance. While identifying appropriate assessments of organizational performance to be used in appraisal decisions, agencies are also to communicate the organizational performance to the senior executives, PRB members, and other reviewing officials--including supervisors who complete the ratings--involved in appraisal decisions prior to the completion of individual performance ratings. In its certification regulations, OPM does not specify the format in which agencies need to communicate organizational performance; however, OPM has emphasized the importance of communicating to individuals involved in appraisal decisions the effect organizational performance can have on individual ratings and overall rating distributions through briefings or other communications. All of the selected agencies have policies in place for factoring organizational performance into senior executive appraisal decisions. While the agencies identified common organizational assessments, such as the President's Management Agenda (PMA), PAR, or PART results for consideration in senior executive appraisal decisions, several agencies identified other types of tools to assess performance at different levels of the organization, such as the bureau, office, or program levels. For example, NRC provides summary reports capturing office-level performance to rating and reviewing officials for appraising senior executive performance. Twice a year, NRC's senior performance officials (SPO)--two top-level executives responsible for assessing organizational performance--conduct assessments for each office that take into account quarterly office performance reports on their operating plans, an interoffice survey completed by the other directors as identified by NRC on the office's performance, as well as the office director's self-assessment of the office's performance. According to an NRC official, the resulting SPO summary reports are used in the midyear feedback by senior executives and their supervisors to identify areas for improvement for the remainder of the appraisal cycle. At the end of the appraisal cycle, rating officials and PRB members are to consider the SPO summary reports in appraising senior executive performance. To assess bureau-level performance, Treasury uses a departmentwide organizational assessment tool that provides a "snapshot" of each bureau's performance across various indicators of organizational performance, such as the PAR, PART results, PMA areas, OPM's Federal Human Capital Survey results, budget data, and information on material weaknesses. The performance information is provided to PRB members and reviewing officials to help inform their senior executive appraisal recommendations. The selected agencies varied in how they provided and communicated organizational performance assessments to PRB members and other reviewing officials to help inform senior executive appraisal recommendations. Several of the selected agencies shared the organizational performance assessments and communicated the importance of considering organizational performance through briefings, training, or document packages for the PRB meetings, while one agency did not provide or communicate any information regarding organizational performance. For example, at Treasury, all the PRBs across the department were briefed on the tool used to assess organizational performance and the importance of considering organizational performance in appraising senior executive performance. DOD provided the heads of its components with a departmentwide organizational assessment to be used in appraising senior executive performance and, as a check across the components, asked for copies of the training given to the PRB members and other reviewing officials on factoring organizational performance into senior executive appraisal recommendations. Through the office of the Deputy Secretary for Defense, DOD developed an assessment of the department's overall performance against its overall priorities for fiscal year 2007. According to a DOD official, the components had the flexibility to develop their own organizational assessments using the department's assessment as a guide and to consider other indicators of organizational performance. Having the components provide the department with their communications of organizational performance helps provide a check in the process across the components and ensures that the spirit and policies of the performance management system are being followed, according to a senior DOD official. As part of the documents received prior to the meeting, NRC provides PRB members with various indicators of organizational performance, such as the SPO summary reports, PAR, and PART information. As part of communicating the organizational assessments, NRC instructs the PRB members to review the summary of proposed ratings and scores for consistency with SPO reports, PAR, and PART outcomes, with rankings of executives recommended by office directors, and across offices and programs. Similarly, DOE provides its PRB members snapshots of the Consolidated Quarterly Performance Reports relevant to the senior executives that measure how each departmental element performed respective to the goals and targets in its annual performance plan. According to the Director of the Office of Human Capital Management, the Deputy Secretary also verbally briefed the PRB members on the importance of considering organizational performance in appraising executive performance. On the other hand, State did not provide its PRB members and other reviewers with any specific information on organizational performance to help inform their senior executive appraisal recommendations for the most recently completed appraisal cycle. According to State officials, PRB members received packages of information to help inform their decisions, including senior executives' performance plans and appraisals, the performance management policy, and the memo from the Director General of the Foreign Service and Director of Human Resources on performance bonuses and pay adjustment amounts and distributions for that cycle. While a senior State human resources official said that the PRB was made aware of a variety of organizational performance assessments that could be readily accessible, if needed, the PRB members did not receive any specific assessments of organizational performance. Effective performance management systems make meaningful distinctions between acceptable and outstanding performance of individuals and appropriately reward those who perform at the highest level. In order to receive certification of their SES systems from OPM with OMB concurrence, agencies are to design and administer performance appraisal systems that make meaningful distinctions based on relative performance through performance rating and resulting performance payouts (e.g., bonuses and pay adjustments). Specifically, agencies are to use multiple rating levels--four or five levels--and reward the highest-performing executives with the highest ratings and largest pay adjustments and bonuses, among other things. Several of the agencies designed their appraisal systems to help allow for differentiations when assessing and rewarding executive performance by establishing tier structures or prescribed performance payout ranges based on the resulting performance rating. For example, NRC uses three tiers called position groups to differentiate its senior executives' basic pay and the resulting bonus amounts based on ratings received at the end of the appraisal cycle. NRC divides its executives into three groups (A, B, and C) based on difficulty of assignment and scope of responsibilities of the positions and annually sets basic pay ceilings for each of the groups tied to the levels of the Executive Schedule (EX), as shown in table 1. Pay ceilings within each group allow NRC to reserve pay above EX-III for executives who demonstrate the highest levels of performance, including the greatest contribution to organizational performance as determined through the appraisal system. NRC uses the position groups and resulting performance ratings as the basis for its bonus structure to help ensure that executives in the higher position groups with the higher performance ratings receive the larger bonuses. For example, for fiscal year 2007, an executive in the highest position group (A) that received an outstanding rating was to receive $30,000, while an executive in the lowest group (C) with the same rating was to receive a $20,000 bonus. According to an NRC official, the bonus range for executives in group C with excellent ratings was intended to help allow for meaningful distinctions in performance to be made within that group, as well as to give the agency flexibility in the amount of bonuses to be awarded. State also uses a structure with six tiers to help differentiate executive performance based on the ratings and bonuses and allocate pay adjustment amounts for its senior executives, with executives who are placed in the highest tier (I) receiving a larger percentage pay adjustment than executives in a lower tier (V) who received the annual percentage adjustment to the EX pay schedule, which was 2.5 percent in 2008. DOE sets prescribed ranges tied to performance ratings prior to finalizing ratings to help create a greater distinction between bonus amounts for the top and middle performers and differentiate pay adjustment caps. Specifically, for fiscal year 2007, DOE required that all executives receiving an outstanding rating receive a bonus of 12 to 20 percent of base pay, while executives receiving a meets expectations rating were eligible to receive a bonus of 5 to 9 percent, but at management's discretion. For pay adjustments, executives were eligible to receive a discretionary increase of up to 5 or 7 percent of basic pay if rated at meets expectations or outstanding, respectively. Executives who receive the other two rating levels--needs improvement or unsatisfactory--cannot receive any bonuses or pay increases. We have reported that using multiple rating levels provides a useful framework for making distinctions in performance by allowing an agency to differentiate among individuals' performance. All of the selected agencies have four or five rating levels in place for assessing senior executive performance. While the selected agencies designed their appraisal and pay systems to help make meaningful distinctions in performance through ratings, our analysis shows that the senior executives were concentrated at the top two rating levels for the most recently completed appraisal cycle, as shown in figure 1. At State and USAID, about 69 percent and 60 percent of senior executives, respectively, received the top performance rating. At the other four agencies, the largest percentage of executives received the second highest rating--ranging from about 65 percent at NRC to 45 percent at Treasury. Conversely, less than 1 percent of senior executives across the selected agencies received a rating below fully successful (level 3). As a point of comparison, about 43 percent of career SES governmentwide received the top performance rating for fiscal year 2006, the most recent governmentwide data available as reported by OPM. Similar to the selected agencies, less than 1 percent of career SES governmentwide received a rating below fully successful in fiscal year 2006. According to State's Deputy Assistant Secretary for the Bureau of Human Resources, historically, the vast majority of senior executives have received the highest rating of outstanding, including for fiscal year 2007. Since the implementation of performance-based pay, this official said State has struggled with changing the culture and general perception among senior executives that any rating less than outstanding is a failure. DOD is communicating the message that a fully successful or equivalent rating is a valued and quality rating to help change its culture and make more meaningful distinctions in ratings. Part of this communication is developing common benchmark descriptors for the performance elements at the five, four, and three rating levels. The Principal Deputy Under Secretary of Defense for Civilian Personnel Policy said she hopes that developing common definitions for the performance elements at all three levels will aid the development of a common understanding and in turn make more meaningful distinctions in ratings. The agency official recognizes that this shift to giving fully successful ratings is a significant cultural change and it will take some time to fully transform the culture. The percentage of eligible executives that received bonuses or pay adjustments varied across the selected agencies for fiscal year 2007, as shown in table 2. The percentage of eligible senior executives that received bonuses ranged from about 92 percent at DOD to about 30 percent at USAID, with the average dollar amount ranging from $11,034 at State to about $17,917 at NRC. For pay adjustments, all eligible executives at State received pay adjustments, while about 88 percent of eligible executives at DOE received adjustments, with the average dollar amount ranging from about $5,414 at NRC to about $6,243 at DOE. As a point of comparison, about 67 percent of career SES members received bonuses with an average dollar amount of $13,292 for fiscal year 2006, according to governmentwide data reported by OPM. The governmentwide percentage of career SES receiving pay adjustments and average dollar amount of the adjustments in the aggregate are not available from OPM's governmentwide data report for fiscal year 2006. The selected agencies have policies in place where only senior executives who receive a rating of fully successful (level 3) or higher are eligible to receive bonuses or pay increases. Also affecting executives' bonus eligibility are the agencies' policies on awarding bonuses to executives who also received Presidential Rank Awards that year, which varied among the selected agencies. NRC, State, and Treasury do not allow executives to receive both awards in the same year, while DOD, DOE, and USAID allow the practice. According to OPM regulations, agencies are to reward the highest- performing executives with the highest ratings and largest bonuses and pay adjustments. At almost all of the agencies, the highest-performing executives (rated at level 5) made up the greatest percentage of eligible executives receiving bonuses, with the exception of NRC where all the eligible executives rated at the top two levels received a bonus. Similarly, the executives rated at the highest level received the largest bonuses on average--about $23,333 at NRC compared to about $11,034 at State. State only awarded bonuses to executives receiving the top rating of outstanding for fiscal year 2007. In addition, senior executives at NRC and USAID rated at fully successful (level 3) did not receive bonuses. (See fig. 2.) In a memo to agencies on the certification process, OPM stated that senior executives who receive a fully successful or higher rating and are paid at a level consistent with their current responsibilities should receive a pay increase. According to an OPM official, agencies are not required to give these executives pay increases, but OPM considers fully successful to be a good rating and encourages agencies to recognize and reward executives performing at this rating level. At the selected agencies, the majority of eligible senior executives rated at fully successful received pay adjustments for fiscal year 2007, as shown in figure 3. Unlike the bonus distributions by rating level, at some of the agencies, the highest- performing executives who received a rating of level 5 did not make up the greatest percentage of executives receiving pay adjustments with the largest increases on average. For example, at USAID, all eligible executives who received a level 3 rating received a pay adjustment, while about 92 percent of eligible executives rated at level 5 received an adjustment. For all the agencies except Treasury, the executives rated at the highest level received the largest pay adjustments on average--about $7,473 at USAID compared to about $6,133 at NRC. At Treasury, executives rated at levels five, four, and three on average received about the same pay adjustment amounts primarily due to pay cap issues. The governmentwide results of the 2008 OPM SES survey show that the majority of senior executives responded that their bonus or salary increase was linked to their performance rating to a very great or great extent. However, less than a third of senior executives strongly agreed or agreed that bonus amounts or pay distinctions were meaningfully different among the executives. These results show that making meaningful distinctions in bonuses and pay can be a challenge. We have reported that agencies need to have modern, effective, credible, and, as appropriate, validated performance management systems in place with adequate safeguards to ensure fairness and prevent politicization and abuse. All of the selected agencies have built safeguards into their senior executive performance appraisal and pay systems--such as predecisional checks of performance appraisal recommendations through higher-level reviews and PRBs as well as transparency in communicating the aggregate results--to help enhance the credibility, fairness, and transparency of their systems, although they varied in how the safeguards have been implemented. Our preliminary results show that there are opportunities for improvement in the communication of aggregate appraisal results to all senior executives. By law, as part of their SES appraisal systems, all agencies must provide their senior executives with an opportunity to view their appraisals and ratings and to request a review of the recommended performance ratings by higher-level officials, before the ratings become final. The higher-level reviewer cannot change the initial summary rating given by the supervisor, but may recommend a different rating in writing to the PRB that is shared with the senior executive and the supervisor. For example, according to State's policy, an executive may request a higher-level review of the initial rating in writing prior to the PRB convening at which time the initial summary rating, the executive's request, and the higher-level reviewing official's written findings and recommendations are considered. The PRB is to provide a written recommendation on the executive's summary rating to State's Director General of the Foreign Service and Director of Human Resources, who makes the final appraisal decisions. Further, all agencies must establish one or more PRBs to help ensure that performance appraisals reflect both individual and organizational performance and that rating, bonus, and pay adjustment recommendations are consistently made. The PRB is to review senior executives' initial summary performance ratings and other relevant documents and make written recommendations on the performance of the senior executives to the agency head or appointing authority. The selected agencies varied in their PRB structures and in who provided the final approval of the appraisal decisions. For example, given its small number of senior executives, USAID has one PRB that is responsible for making recommendations to the Administrator for his/her final approval on all rated career executives for their annual summary ratings, bonuses, performance-based pay adjustments, and Presidential Rank Award nominations. On the other hand, DOD has multiple PRBs within and across its components and agencies with separate authorizing officials who give the final approval of rating and performance payout recommendations. According to a DOD official, there is not a central PRB that oversees all the PRBs within the department responsible for recommending approval of the final appraisal decisions for all senior executives. To help ensure consistency in appraisal recommendations across the department and between the various authorizing officials, the components are to provide their final rating and performance payout distributions to the Under Secretary of Defense for Personnel and Readiness to be validated prior to executives receiving the bonuses and pay adjustments. As part of the validation process, the Under Secretary of Defense for Personnel and Readiness checks to ensure that meaningful distinctions were made and ratings, bonuses, and pay adjustments reflect organizational and individual performance, among other things, before performance bonuses and pay increases are made effective. To help enhance the transparency of the system, agencies can communicate the overall aggregate results of the performance appraisal decisions--ratings, bonuses, and pay adjustment distributions--to senior executives while protecting individual confidentiality, and as a result, let executives know where they stand in the organization. Further, OPM has recognized the importance of communicating the overall rating distributions and performance payout averages through its guidance for certifying agencies' SES systems, and factors it into certification decisions. OPM asks agencies to brief their SES members on the results of the completed appraisal process to make sure that the dynamics of the general distribution of ratings and accompanying rewards are fully understood. The results of the OPM survey of senior executives show that the communication of overall performance appraisal results is not widely practiced throughout the government. Specifically, 65 percent of respondents said that they were not given a summary of their agency's SES performance ratings, bonuses, and pay adjustments. The selected agencies communicated the aggregate results in varying ways. For example, Treasury and DOD posted the aggregate rating, bonus, and pay adjustment distributions for senior executives on their Web sites with comparison of data across previous fiscal years. In communicating the results of the most recent appraisal cycle, NRC sent an e-mail to all senior executives sharing the percentage of executives at each rating level and the percentages receiving bonuses and pay adjustments as well as the average dollar amounts. According to an NRC official, the agency periodically holds agencywide "all hands" SES meetings where the results of the appraisal cycle, among other topics, are communicated to executives. Similarly, the Deputy Secretary of DOE provides a memo to all senior executives summarizing the percentage of executives at the top two rating levels and the average bonus and pay adjustment amounts. DOE also includes governmentwide results as reported by OPM as a point of comparison. Further, in that memo, the Deputy Secretary stated his concern with the negligible difference in bonuses and pay adjustments among executives receiving the top two rating levels and stressed the importance of making meaningful distinctions in the allocation of compensation tied to performance ratings in the upcoming appraisal cycle. While USAID shares an individual's appraisal results with that executive, agency officials said that they do not communicate aggregate results to all senior executives. Communicating an executive's individual rating conveys information about how well the executive has performed against the expectations in the performance plan, but is not sufficient to provide a clear picture of how the executive's performance compares with that of other executives in the agency. Further, USAID communicated to all SES members the pay adjustment distributions in ranges by rating level, but not the aggregate results showing the percentage of executives receiving the pay adjustments in total or by rating level. There are opportunities for further refinements in how the aggregate appraisal results are communicated to all senior executives. Mr. Chairman, Senator Voinovich, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have. For further information regarding this statement, please contact J. Christopher Mihm, Managing Director, Strategic Issues, at (202) 512- 6806 or [email protected] or Robert N. Goldenkoff, Director, Strategic Issues, at (202) 512-6806 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Individuals making key contributions to this statement include Belva Martin, Assistant Director; Amber Edwards; Janice Latimer; Meredith Moore; Mary Robison; Sabrina Streagle; and Greg Wilmoth. In November 2003, Congress authorized a new performance-based pay system for members of the Senior Executive Service (SES). With the performance-based pay system, senior executives are to no longer receive annual across-the-board or locality pay adjustments. Agencies are to base pay adjustments for senior executives on individual performance and contributions to the agency's performance by considering the individual's accomplishments and such things as unique skills, qualifications, or competencies of the individual and the individual's significance to the agency's mission and performance, as well as the individual's current responsibilities. The system, which took effect in January 2004, also replaced the six SES pay levels with a single, open-range pay band and raised the cap on base pay and total compensation. For 2008, the caps are $158,500 for base pay (Level III of the Executive Schedule) with a senior executive's total compensation not to exceed $191,300 (Level I of the Executive Schedule). If an agency's senior executive performance appraisal system is certified by the Office of Personnel Management (OPM) and the Office of Management and Budget (OMB) concurs, the caps are increased to $172,200 for base pay (Level II of the Executive Schedule) and $221,100 for total compensation (the total annual compensation payable to the Vice President). To qualify for senior executive pay flexibilities, agencies' performance appraisal systems are evaluated against nine certification criteria and any additional information that OPM and OMB may require to make determinations regarding certification. As shown in table 3, the certification criteria jointly developed by OPM and OMB are broad principles that position agencies to use their pay systems strategically to support the development of a stronger performance culture and the attainment of the agency's mission, goals, and objectives. Appendix II: Highlights of Selected GAO Products 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 2003, Congress and the administration established a performance-based pay system for Senior Executive Service (SES) members that requires a link between individual and organizational performance and pay. Specifically, agencies are allowed to raise SES pay caps if their systems are certified by the Office of Personnel Management (OPM) with concurrence by the Office of Management and Budget (OMB) as meeting specified criteria. GAO was asked to testify on preliminary results of ongoing work analyzing selected executive branch agencies' policies and procedures for their SES performance-based pay systems in the following areas: (1) factoring organizational performance into senior executive performance appraisal decisions, (2) making meaningful distinctions in senior executive performance, and (3) building safeguards into senior executive performance appraisal and pay systems. GAO selected the U.S. Departments of Defense (DOD), Energy (DOE), State, and the Treasury; the U.S. Nuclear Regulatory Commission (NRC); and the United States Agency for International Development (USAID) based on variations in agency mission, organizational structure, and size of their career SES workforces. To date, GAO has analyzed agencies' SES performance management policies and guidance and analyzed aggregate SES performance appraisal data as provided by the agencies for fiscal year 2007. Overall, the selected agencies are making positive steps toward three key areas related to OPM and OMB's certification criteria, with some opportunities for refinements in these areas: (1) Factoring organizational performance into senior executive performance appraisal decisions: -all of the selected agencies have policies in place that require senior executives' performance expectations to be aligned with organizational results and organizational performance to be factored into appraisal decisions. Improvements in communicating organizational performance to reviewing officials could be made. (2) Making meaningful distinctions in senior executive performance: -while all of the selected agencies have multiple rating levels in place for assessing senior executive performance, senior executives were concentrated at the top two rating levels in the fiscal year 2007 appraisal cycle. (3) Building safeguards into senior executive performance appraisal and pay systems: -the selected agencies varied in how they implemented predecisional checks of appraisal recommendations through higher-level reviews and Performance Review Boards as well as transparency in the aggregate results with opportunities to improve communication of aggregate appraisal results to all senior executives.
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Operation Desert Storm revealed many weaknesses in medical capabilities of U.S. forces. Subsequent studies conducted by us and the DOD Inspector General revealed shortcomings in DOD's ability to provide adequate, timely medical support during contingencies and problems with the planning and execution of these efforts. The Joint Staff also identified problems with the current design of DOD's wartime medical system. In response to these problems, DOD and the services embarked on initiatives to correct shortfalls in wartime medical capabilities and improve medical readiness. The decisions that emanate from these efforts over the next few years will determine how wartime medical care will be provided for the foreseeable future. In March 1995, DOD published MRSP to serve as a road map for attaining and sustaining military medical readiness into the 21st century. The Office of the Assistant Secretary of Defense for Health Affairs is responsible for managing MRSP. In developing its MRSP, Health Affairs convened panels of both military and civilian experts to assess medical capability shortfalls in nine functional areas: planning; requirements, capabilities, and assessment; command, control, communications, computers, and information management; logistics; medical evacuation; personnel; training; blood supply; and readiness oversight. For each functional area, the expert panels developed strategic objectives to support the continuum of military operations envisioned in the defense planning guidance for fiscal years 1996-2001. A total of 42 action plans were developed to address shortfalls in the 9 functional areas. In assessing these shortfalls, the panels relied heavily on the reports that we and the DOD Inspector General prepared on the medical reponse during Operation Desert Storm. The panels also identified the offices to be responsible for developing and executing detailed implementation plans. DOD is engaged in other efforts related to the wartime medical care system. Each service initiated a reengineering program to reassess and reconfigure its wartime medical capabilities to be more compatible with plans for two major regional conflicts and operations other than war. DOD is also trying to forecast the wartime medical demands in the year 2020 and design a military health services system that will be responsive to those demands (known as the MHSS 2020 project). In a separate effort, DOD is also updating an April 1994 study (known as the 733 update) to determine wartime medical personnel requirements for the year 2001. To respond to the new national military strategy resulting from the end of the Cold War and problems that we, the Joint Staff, and the DOD Inspector General identified, DOD initiated efforts to improve its wartime medical capabilities. Defense planning guidance, modified in May 1994, requires DOD to be ready to engage in two nearly simultaneous major regional conflicts and prepare for smaller scale operations other than war. DOD assumed that future operations would have far shorter warning times and durations than Cold War scenarios. The transition to the current defense planning guidance, particularly the projected shorter warning times, increased DOD's emphasis on joint service operations and the need to react quickly to a major regional conflict or an operation other than war. This transition has also underscored the need for the services to redesign their wartime medical systems to reduce transportation demands because of limited lift capacity. Medical systems must compete with the movement of combat troops and other war-fighting materials to the theater. On the basis of war games conducted in December 1994, the Joint Staff determined that the commanders in chief were unable to provide adequate lift capability to move medical logistics and deployable hospitals to support two nearly simultaneous major regional conflicts. The Joint Staff recommended that the services investigate the possibility of evacuating casualties more quickly to the United States for treatment. The Joint Staff believed anticipated conflicts might be of such short duration that it would be unlikely that the soldiers would be well enough to return to duty after treatment in the theater. On the basis of war games completed in March 1995, the Joint Staff also recommended that the services approach medical operations from a joint perspective and redesign their medical systems assuming smaller and lighter deployable hospitals and quicker evacuation of patients to the United States for treatment. On September 30, 1993, the DOD Inspector General issued a report outlining several wartime medical problems that were consistent with Joint Staff observations. The Inspector General criticized DOD for a lack of joint medical planning. The report stated that DOD could not ensure the deployability of medical personnel during contingencies for several reasons, including outdated methods for determining personnel requirements, assignment of personnel to incorrect skill areas, and inadequate training of medical personnel. The report also stated that DOD's deployable hospitals lacked sufficient mobility and had incompatible communication capability that limited their ability to prepare for incoming casualties. We have issued a series of reports that describe problems in DOD's wartime medical planning and capability to provide wartime medical care. We found that understaffed and inadequately supplied and equipped medical units in Operation Desert Storm might not have been able to provide adequate care if the predicted number of casualties had occurred. Also, the medical units were not staffed and equipped to provide noncombat care and were unable to support the evacuation of casualties from the combat theater or receive large numbers of chemically contaminated casualties. Other medical force problems included (1) large numbers of nondeployable medical personnel due to unacceptable physical conditions, lack of required skills, and mismatches in medical specialties; (2) a widespread lack of training for the wartime missions; and (3) inadequate or missing equipment and supplies. In addition, we testified in March 1995 that several key factors, such as the population at risk and wounded-in-action rates, that affect the demand for wartime medical care were still being debated. We also stated that reaching agreement on the key factors was critical to arriving at the best wartime medical care system for the future, as it would allow decisionmakers to direct their attention to optimizing the medical care system for that demand. We reported in June 1996 that DOD was still having difficulty reaching agreement on such factors. Our comparison of problems highlighted by MRSP with those we, the Joint Staff, and the DOD Inspector General had previously identified shows that MRSP appropriately describes medical readiness problems needing resolution. The problems outlined in MRSP are also consistent with the recent changes in the Defense Planning Guidance. For example, MRSP points out that current medical planning is based on Cold War assumptions in which the services planned to fight the former Soviet Union individually rather than jointly. This lack of a joint approach made the DOD medical system unresponsive to the full continuum of anticipated contingencies, including major regional conflicts, peacemaking, and disaster relief. Accordingly, MRSP lists specific tasks Health Affairs, the services, the Joint Staff, and other DOD activities should take to ensure that joint medical planning becomes standard throughout DOD. MRSP also identifies the need for the services to modernize their deployable hospitals to reduce their weight and size. This reduction will decrease transportation demands and improve the mobility and transportability of such hospitals. It lists steps, such as incorporating technological advancements and equipment modernization, to correct these problems. Similarly, MRSP describes many factors that inhibit the deployability of medical personnel and lists steps to improve the training and certification of medical personnel to ensure they are adequately prepared to perform functions expected of them while deployed. MRSP outlines corrective actions to address problems in the communications area such as ensuring interoperability and adaptability of individual service medical communication with global communications systems. It also requires specific DOD offices to ensure the availability of critical medical materials needed for a conflict. MRSP also stresses the need for DOD and the services to reexamine and validate the key factors that affect the demand for wartime medical care. Three additional areas are currently being added to MRSP: nuclear, biological, and chemical warfare; operations other than war; and research and development. For each area, an expert panel identified capability shortfalls and developed corrective actions. Health Affairs plans to add these new areas to MRSP by December 31, 1996. Health Affairs got off to a slow start in monitoring progress being made in correcting medical readiness problems. The primary tool Health Affairs uses to monitor progress is its review of periodic updates of implementation plans submitted by the responsible offices. These plans summarize how and when a responsible office intends to correct a particular medical readiness problem described in MRSP. Although the implementation plans do not indicate the amount of funding involved, they describe whether specific corrective actions are fully or partially funded or unfunded. MRSP requires 400 implementation plans because of the multiple tasks and multiple offices responsible for carrying out needed actions. Initially, Health Affairs had difficulty obtaining complete implementation plans in a consistent format from the responsible offices. Although the offices were to submit the plans by the end of June 1995, Health Affairs had not obtained 19 (5 percent) of the required implementation plans as of April 30, 1996. The Joint Staff was responsible for six (32 percent) of the missing plans. A Joint Staff official said that staff turnover and competing priorities delayed the submission of the implementation plans but that they would be completed by the fall of 1996. The other offices responsible for the missing plans were Health Affairs, the Defense Modeling and Simulation Office, and the Office of the Assistant Secretary of Defense for Reserve Affairs. In commenting on our draft report, Health Affairs reported that it had obtained an additional 10 implementation plans, including all of the missing plans from the Joint Staff. Health Affairs also had difficulty collecting and analyzing the initial submissions because of the volume of information. Health Affairs corrected this situation by developing computer software to facilitate the quarterly updating and analysis of the implementation plans and sharing it with the responsible offices. In addition, Health Affairs entered into a contract with an outside firm to put the implementation plans on a computerized network so the responsible offices could continually keep them updated. This project is expected to be accomplished in December 1996. As a part of its monitoring efforts, in February 1996, Health Affairs convened most of the experts that helped develop MRSP to determine whether (1) the individual offices given responsibility for correcting medical readiness problems in MRSP were still appropriate and (2) the anticipated corrective actions described by those offices were responsive to the current readiness problems. These panels recommended several changes in both responsibilities and needed corrective actions. If approved, the changes are expected to be made to MRSP in October 1996. Our analysis of the 1,362 specific tasks included in 400 MRSP implementation plans shows that the responsible offices are making progress in correcting medical readiness problems but that some tasks are behind schedule. More specifically, 604 (44.3 percent) of the 1,362 tasks were reported as completed, but 94 (6.9 percent) were reported as behind schedule as of April 30, 1996. Milestones for completing the remaining 664 tasks have not yet occurred. During the summer of 1995, the Assistant Secretary of Defense for Health Affairs and the Surgeons General of the services identified the following six plans for priority monitoring: joint medical planning, information management, joint medical logistics and planning, medical evacuation, deployability of medical personnel, and medical readiness oversight. The tasks for the six priority plans and their implementation status are shown in table 1. Our analysis is meant to provide a general overview of how the responsible DOD activities view their attempts to correct the medical readiness problems assigned to them without regard to whether one task is more critical than another. Also, the corrective actions may not be directly attributable to the MRSP process; some of the DOD offices responsible for such issues had already undertaken corrective actions. (MRSP does not duplicate these efforts but attempts to consolidate their oversight.) Although progress is being made in implementing MRSP, some potential obstacles may hamper the timely correction of problems noted in the plan. One of these obstacles involves the three offices (Health Affairs, the Defense Modeling and Simulation Office, and the Office of the Assistant Secretary of Defense for Reserve Affairs) that have not yet submitted detailed implementation plans for corrective actions, which raises questions about whether problems are being addressed. Some DOD officials told us that they were concerned that those offices outside the control of Health Affairs have not given implementation of MRSP the level of attention it deserves. In this regard, the officials believe that MRSP would have been given higher visibility and priority for implementation if it had been published with the signature of the Secretary of Defense or Deputy Secretary of Defense rather than the Assistant Secretary of Defense for Health Affairs. Lack of funding may also hamper implementation of MRSP. When MRSP was published, no additional funding was given to responsible program offices for implementing the plan. Although the offices were expected to fund the corrective actions from their ongoing appropriations, many corrective actions were not funded or were only partially funded as of April 30, 1996. Health Affairs officials did not know the amount of these funding shortfalls, but they were planning to assess the impact of the shortfalls in 1997. Moreover, Health Affairs has limited knowledge regarding the extent to which problems noted in MRSP have been resolved by the corrective actions identified in the implementation plans. Health Affairs is in the process of developing a methodology for making this assessment and plans to begin using it shortly after its completion in March 1997. Each service has initiated a medical reengineering program to address shortfalls in medical capabilities. Each reengineering program is at a different stage of development but all are expected to yield enhancements to current system capabilities by making organizational changes, reconfiguring deployable systems, and adapting clinical capabilities to different mission requirements. The services anticipate that these programs will meet their reengineering goals of developing smaller and more mobile systems. In early 1994, the Army's Surgeon General initiated a medical reengineering program to reconfigure the Army's combat health support operations. This program was to incorporate the lessons learned from Operation Desert Storm and other operations and reflect the types of combat operations anticipated for the 21st century. In assessing how its combat health support system should be reconfigured, the Army Medical Command assembled panels of experts for 10 functional areas, such as hospitalization, medical evacuation, and medical logistics. The panels assessed current medical capabilities and proposed organizational and operational changes. The proposed changes are designed to make medical systems modular and more mobile and flexible. Also, the changes are intended to make the systems capable of effectively operating simultaneously in multiple locations and tailored to accommodate missions ranging from intense combat to peacekeeping and humanitarian operations. Significant changes are proposed for hospital care, which is currently provided in three types of facilities: the Combat Support Hospital, Field Hospital, and General Hospital. The Army is moving toward smaller hospital modules that can provide a full range of services and be self-sufficient and ready for rapid response. One reconfigured 248-bed hospital will replace the 3 current types of hospitals. This new hospital will consist of two self-supporting modules: a mobile 84-bed module and a larger 164-bed module. The 84-bed module will provide increased flexibility because 3 of the modules can be prepositioned aboard a ship and later deployed in separate units if needed. The current Combat Support Hospital must be deployed as a single unit. The Mobile Army Surgical Hospitals are being phased out. Their mission of providing urgent resuscitative surgery will be assumed by the mobile forward surgical teams, which will perform surgery at locations deeper in the battlefield or closer to the place of wounding. To provide increased flexibility, a medical detachment will be available to augment capability at hospitals throughout the theater. Specialty augmentation teams using the same equipment will be consolidated, and another team will be added to provide capabilities for operations other than war. The proposal also includes improved communications technology, information systems, and use of telemedicine. In December 1995, the Army's Surgeon General approved the proposed reengineering changes, and they are currently under review by the Army's Training and Doctrine Command, the commanders in chief, and major commands. The changes are expected to be submitted to the Army's Chief of Staff for approval in September 1996. If approved, implementation of the proposals will begin in fiscal year 2000 and be completed by fiscal year 2005. The Air Force Surgeon General initiated a project in January 1994 to reengineer approaches for delivering medical care during conflicts or other kinds of operations. The initiative consists of three phases: concept development, determination of feasibility, and implementation. In June 1995, the Air Force Surgeon General approved a new concept that envisions small deployable medical systems to allow commanders more flexibility to tailor their medical care response to a specific mission. Currently, the Air Force generally deploys a 50-bed, surgically intensive, air transportable hospital to a conflict. Under the new concept, more than 40 clinical modules, including general surgery, primary care, intensive care, and dental services, can be deployed individually or in various combinations. According to Air Force officials, the use of a more tailored approach requires less airlift capacity and provides the types of services that are appropriate for a specific mission. To provide additional mobility and flexibility, the standard air transportable hospital can be scaled down to 25 beds, with an option of deploying a 10-bed trauma clinic to stabilize trauma patients and provide outpatient care. The concept also uses telemedicine to give forward deployed medical personnel the capability to obtain remote consultations in several disciplines, including radiology, dermatology, and pathology. To evacuate patients more quickly from the theater, the Air Force plans to use critical care aeromedical transport teams to stabilize and evacuate critically ill patients to the United States or other locations for treatment. Each team can be tailored to meet the needs of specific patients, but the teams generally consist of a physician, nurse, and respiratory therapist. The Air Force is testing this concept and has formed seven teams that have transported critically ill patients from Bosnia and Saudi Arabia. During the summer of 1996, the Air Force realized that its proposed reengineering changes were feasible. As a result, officials have initiated the implementation phase. In addition, the officials were trying to obtain funding through the 1998-2002 Program Objective Memorandum cycle so that the changes could be fully implemented by the end of fiscal year 2002. The Navy's fleet hospital reconfiguration project began in the fall of 1995 with the goal of making fleet hospitals lighter and more mobile and mission flexible. Two working groups are involved in the study; one is focusing on reconfiguring fleet hospitals until the year 2010, and the other is focusing on changes in 2010 and beyond. The first working group developed a preliminary design of a small hospital, but the design has not been approved by Navy leaders. The proposed design, called the Naval Expeditionary Medical Support System, focuses wartime medical capability around a core unit with a capacity of 20 to 130 beds. Although the current 500-bed fleet hospital will be maintained, Navy officials envision that either the 130- or the 500-bed hospital will be set up in a given theater, but not both. In addition, the concept includes an option to extract a 100-bed unit from the standard 500-bed fleet hospital to use during an operation other than war. Under this concept, the Navy will not maintain any duplicate equipment. If the new concept is approved, the fleet hospitals will be repackaged as they are brought in for their periodic modernizing, beginning as early as 1998. The Navy is also revising its procedures for staffing hospitals. The Navy's requirement for fleet hospitals has decreased from 17 to 12. Six of these hospitals will be staffed primarily by active duty personnel and six will be staffed by reserve personnel. To increase staffing efficiency and productivity, the Navy will now staff its active duty deployable hospitals with personnel from specific medical treatment facilities. In the past, fleet hospitals were staffed by pulling medical personnel from any location, but this approach did not work particularly well in Operation Desert Storm. The revised concept presumes that medical personnel who work together on a day-to-day basis will perform better than staff who are taken from different locations within the system. Similarly, the Navy plans to designate specific reserve units to staff the six reserve component fleet hospitals. Other reserve medical units will be designated to replace active duty staff taken from specific medical treatment facilities. To ensure that active duty medical personnel earmarked for deployment get the periodic readiness training they need, the Navy designated the executive officers of medical treatment facilities as the commanding officers of the fleet hospitals when they deploy. For reserve medical personnel in units designated to staff fleet hospitals, Navy officials anticipate that the units will train together at a fleet hospital every 2 years. When the reservists do not train at a fleet hospital, they will complete their annual 2-week training session at a Navy medical treatment facility or at their units' designated hospital. In late 1993, the Marine Corps began to reassess the reconfiguration of its medical battalions, which are part of its combat units. The need to reconfigure these battalions grew out of lessons learned from Desert Storm showing that the battalions were too heavy to keep pace with and support the movement of the ground combat units. The Marine Corps found that the capabilities of the medical battalions had been expanded during the Vietnam War era to compensate for the lack of deployable hospitals at higher echelons of care. However, these expanded capabilities were beyond the battalions' mission. The medical supplies and equipment included in each battalion, which should have been assigned to a higher echelon of care, had greatly increased the battalion's weight and size, and hampered its mobility. The restructuring of the medical battalion essentially reduced those specialty care capabilities that were beyond the mission requirements. This restructuring also placed more reliance on evacuating patients needing such specialty care to higher echelons of care provided by the Navy or other services. In addition, the restructuring reduced the number of cots by 52 percent, from 540 to 260, and reduced the weight of the medical battalion by 20 percent. The new surgical companies within the battalion are staffed with general surgeons and trauma care providers and no longer contain orthopedic and other surgical subspecialties, such as thoracic surgeons. Patients requiring specialty care will be evacuated to other facilities where such care is available. Marine Corps officials believe that the restructured medical battalion, with its decreased lift requirement and smaller footprint, will allow the battalion to move with the combat maneuver elements and provide direct resuscitative health service support to the combat forces. The Commandant of the Marine Corps approved the restructured medical battalion in November 1995. Two of the four Marine Corps medical battalions have begun implementing the restructuring, and the others will begin reconfiguration by October 1996. Full implementation of the restructuring is expected by the year 2000, assuming funding is available from the Program Objective Memorandum process. In February 1996, Health Affairs began its MHSS 2020 project to forecast changes in health care delivery, with the goal of facilitating the integration of these future health care practices into the design of the military health services system. The project is designed to identify 25-year trends and breakthroughs in both clinical and nonclinical technologies; determine how to apply these technologies across DOD health care responsibilities, which range from personal fitness to treatment of war zone casualties; and identify how the military health services system should be funded and staffed to transition to the year 2020. Participants in the project include practitioners, researchers, and academicians from several disciplines in the federal and private sectors. The project will involve three stages. First, about 200 experts--organized into 20 specialized working groups concentrating on clinical, administrative, and information management issues--will identify future trends in their fields. Second, 10 multidisciplinary groups will develop strategic planning scenarios for specific areas of military health from the trend information. Third, teams will identify general and specific proposals to help transition the current military health services system from today to the year 2020. DOD expects the future scenarios to be finalized in December 1996. The MHSS 2020 project could serve as the mechanism for identifying future medical system requirements against which MRSP and the services' reengineering programs should be focused. However, the extent to which MRSP and these reengineering programs will be compatible with future medical system requirements will not be known until the MHSS 2020 project is completed. We recommend that the Secretary of Defense direct Health Affairs, the Defense Modeling and Simulation Office, and the Office of the Assistant Secretary of Defense for Reserve Affairs to develop and begin implementing plans to correct the medical capability problems noted in MRSP. Without such direction, these offices might continue to give low priority to medical readiness. We also recommend that the Secretary of Defense direct the Assistant Secretary of Defense for Health Affairs to (1) assess the extent to which actions taken in response to MRSP have corrected medical capability problems, (2) take steps to resolve other unsettled problems, and (3) use the results of the MHSS 2020 project to guide the focus of MRSP and service reengineering initiatives. In commenting on a draft of this report, DOD concurred with our recommendations and agreed with the accuracy of the report. DOD stated that it was aggressively pursuing resolution of the problems described in our report. For example, through Health Affairs/Joint Staff coordination, all of the missing Joint Staff implementation plans have been developed. DOD also commented that Health Affairs has begun the process of assessing the extent to which actions taken in response to MRSP have corrected medical capability problems. From these assessments, DOD will develop strategies for resolution of unresolved problems. DOD provided some technical comments to our report and we incorporated them into the text of our report where appropriate. DOD's comments appear in appendix I. To obtain information for the report, we reviewed documents, reports, and information relevant to the development and implementation of MRSP, services' medical reengineering programs, and MHSS 2020 project. We interviewed officials from the Office of the Assistant Secretary of Defense for Health Affairs, Joint Staff and Office of the Assistant Secretary of Defense for Reserve Affairs in Washington, D.C; and the Offices of the Surgeons General at Navy and Air Force Headquarters in Washington, D.C., and at the Army Medical Command in San Antonio, Texas. We also interviewed officials from the U.S. Central Command, Tampa, Florida; U.S. Transportation Command, Scott Air Force Base, Illinois; U.S. Atlantic Command, Norfolk, Virginia; Defense Medical Standardization Board, Fort Detrick, Maryland; and the Marine Corps Combat Development Command, Quantico, Virginia. We reviewed the methodology used to develop MRSP and discussed its reasonableness with several DOD officials. We compared the content of MRSP with the medical capability problem areas identified in our work on Operation Desert Storm and with similar work conducted by the DOD Inspector General. We reviewed the detailed implementation plans prepared by the primary action offices and identified the extent to which tasks in the plans were reported to be completed, on schedule, or delayed. We did not weigh the relative importance of one task against another. We used the funding status information provided by the primary action offices. We discussed potential obstacles in implementing MRSP with officials at the locations we visited. We obtained briefings from all of the services on their medical reengineering programs and reviewed documentation concerning the factors that led to the reengineering efforts, process used to identify needed changes, extent to which the programs address common goals for future medical capabilities, and current status of the reengineering programs. We interviewed agency officials regarding any overlaps or inconsistencies among the services' reengineering programs. We examined the content of each services' reengineering program to learn whether proposed changes were responsive to the problems we and the DOD Inspector General had previously reported for wartime medical capabilities. We conducted our review from July 1995 to August 1996 in accordance with generally accepted government auditing standards. We are sending copies of this report to other interested congressional committees; the Secretaries of Defense, the Army, the Navy, and the Air Force; the Commandant of the Marine Corps; and the Director of the Office of Management and Budget. We will also send copies to others on request. If you or your staff have any questions about this report, please call me on (202)512-5140. Major contributors to this report are listed in appendix II. Steve J. Fox Lynn C. Johnson William L. Mathers Dawn R. Godfrey 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 reviewed the Department of Defense's (DOD) efforts to reassess and improve its medical capabilities, focusing on: (1) DOD implementation of its Medical Readiness Strategic Plan (MRSP); (2) the services' medical reengineering efforts; and (3) the Military Health Services System (MHSS) 2020 project to identify future wartime medical system requirements. GAO found that: (1) DOD and the services are making progress to correct the medical capability problems that have hampered recent military operations; (2) MRSP appropriately focuses on problems that GAO and DOD have identified; (3) DOD is placing increased emphasis on implementing MRSP, after a slow start; (4) many key MRSP tasks are unfunded or partially funded; (5) the services are reconfiguring their combat hospitals into smaller components and undertaking efforts to significantly enhance their current medical system capabilities; (6) the MHSS 2020 Project has not yet identified how military health capabilities should be funded and staffed in the future; and (7) until MHSS 2020 is completed, DOD cannot determine how compatible MRSP and service reengineering programs will be with future requirements.
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The United States Housing Act of 1937 established the Public Housing Program to provide decent, safe, and sanitary housing for low-income families. For many years, this act was interpreted to exclude Native Americans living in or near tribal areas. In 1961, however, HUD and the Bureau of Indian Affairs (BIA) determined that Native Americans could legally participate in the rental assistance for low-income families authorized by the 1937 act and issued regulations to implement this determination. In 1988, the Indian Housing Act established a separate Indian housing program and prompted HUD to issue regulations specific to this program. With the recently enacted Native American Housing Assistance and Self-Determination Act of 1996 (whose regulations are scheduled to take effect on Oct. 1, 1997), the Congress completed the process of separating Indian housing from public housing. According to the May 1996 report by the Urban Institute, the housing needs of Native Americans are growing. Their population rose sixfold over the past four decades to over 2 million in 1990, 60 percent of whom live in tribal areas or in the surrounding counties. And, compared to non-Indians, Native Americans are more family-oriented--37 percent of Native American households are married couples with children versus 28 percent of non-Indian households. Compared to non-Indians, Native Americans have a higher unemployment rate (14 percent versus 6 percent), a smaller number of workers in "for-profit" firms per thousand people (255 versus 362), and a higher share of households with very low incomes (33 percent versus 24 percent). Moreover, Indian housing conditions are much worse than housing conditions in other areas of the country: 40 percent of Native Americans in tribal areas live in overcrowded or physically inadequate housing compared with 6 percent of the U.S. population. Through its Native American Programs headquarters office and its six field offices, and with the help of approximately 189 Indian housing authorities, HUD administers the majority of the housing programs that benefit Native American families in or near tribal areas. Several significant differences exist, however, between HUD's assistance to these families and to families (non-Indian and Indian) living in urban and other areas. First, HUD's support for Native Americans derives, in part, from the nation's recognition of special obligations to the Native American population and is reflected in treaties, legislation, and executive orders. Second, the federal government deals with recognized tribes directly in a sovereign-to-sovereign relationship, rather than through the general system of state and local government. This status allows tribes to establish their own system of laws and courts. Third, the Bureau of Indian Affairs often holds in trust a considerable amount of land for a tribe as a whole; thus, this land is not subdivided into many private holdings as occurs in the rest of the country. This trust arrangement has frustrated the development of private housing markets in tribal areas and has long been seen as a special justification for federal assistance in housing production. Under current regulations, IHAs administer most of the low-income housing assistance that HUD provides to Native Americans. But HUD also provides some housing assistance directly to tribes and individuals. Funding provided through housing authorities is used to develop housing for eventual ownership by individual families through the Mutual Help Program under which families lease and then buy their homes by making payments to the IHA of approximately 15 percent of their adjusted income and must cover their own routine operating and maintenance expenses; develop and maintain rental housing for low-income families through the Rental Housing Program which, like the public housing program, makes low-income rental housing available to families from an IHA at a cost of 30 percent of their adjusted income; modernize and rehabilitate established low-income housing through the public housing modernization program; and subsidize IHAs to defray operating expenses that rental income does not cover and provide rental vouchers for low-income families. Funding available to tribes and individuals includes loan guarantees for home mortgages, block grants through the HOME program for tribes to develop affordable housing in tribal areas, and community development block grants to enhance infrastructure and other economic development activities. As shown in table 1, over the past decade HUD provided a total of $4.3 billion for these programs, which have produced or are expected to produce a total of 24,542 housing units. HUD and IHAs encounter unique challenges and costly conditions in administering and providing housing programs for Native Americans. Because of the over 550 separate Indian nations, cultures, and traditions, not all of these conditions are equally prevalent throughout tribal areas, nor do they have a common impact on developing and maintaining housing. Among the challenges and conditions highlighted in our discussions with officials of HUD and several IHAs, as well as in the May 1996 study by the Urban Institute, are the remoteness and limited human resources of many IHAs and the Native American communities they serve; the lack of suitable land and the severity of the climate; the difficulty contractors and IHAs have in complying with statutory requirements to give hiring preference to Native Americans; and the pressure that vandalism, tenants' neglect, and unpaid rent put on scarce maintenance funds. The extent and pattern of the lands held by Native Americans are very different today from what they were at the beginning of the 19th century. During that century, the land area over which Indians had sovereignty and which was available for creating reservations was often reduced to small pieces in isolated areas. The remoteness of some of these tribal areas has created significant problems for housing development. In contrast to metropolitan areas, where basic infrastructure systems (including sewers, landfills, electricity, water supply and treatment, and paved roads) are already in place, remote tribal areas may require a large capital investment to create these systems to support new housing. The remoteness of many of the tribal areas also increases the cost of transporting the supplies, raises labor costs, and reduces the availability of supplies and of an "institutional infrastructure" of developers and governmental and private entities. For example, transporting a drilling rig over many miles and hours into the desert to a tribal area in California is far more costly than if the well had been needed in a less remote area. In addition, as the Urban Institute found in its study of Native American housing needs, private housing developers, contractors, and suppliers; governmental planners and building inspectors; private financial institutions; and nonprofit groups are all less available in remote tribal areas. The limited human resources of many IHAs also contributes to the high cost of developing and maintaining housing. HUD's Deputy Assistant Secretary for Native American Programs told us that housing authorities that recruit their staff from a small tribal population often have difficulty finding qualified managers to administer multimillion-dollar housing grants. This problem is made worse when coupled with the statutory requirement to give Indians first consideration for such jobs. Because many Indian applicants have incomplete formal educations, they often need more time to become familiar with HUD's assisted housing program and regulations than applicants from the larger pool enjoyed by a public housing authority in an urban area, according to the Deputy Assistant Secretary. The executive director at the Gila River Housing Authority in Sacaton, Arizona, echoed these views when he described his inability to hire skilled and dependable tribal members. He pointed out that many skilled members have personal problems associated with drugs and alcohol, causing the housing authority to search outside the tribal area for much of its labor force. He also said that because members of the available semiskilled work force need a significant amount of training before they are employable, he cannot afford to hire them. Moreover, some of the tribe's laborers are drawn to cities away from the reservation, he said, because of the greater employment opportunities and higher wages there. This lack of skilled human resources is costly. HUD officials told us that as a general rule in the construction industry, labor costs should not exceed 50 percent of the total cost, but in tribal areas labor costs can run as high as 65 percent because contractors generally have to bring in skilled workers and pay for lodging and commuting costs. In many tribal areas, observers see what appears to be a vast expanse of unused land. However, a lack of available land is, in fact, a constraint that many IHAs face as they develop low-income housing. Factors that limit the availability of land for housing include the trusts in which BIA holds the land that, until this year, limited leases to 25 years in many instances. Special environmental and other restrictions also exist. For example, in planning for development, IHAs and tribes avoid archaeological and traditional burial sites because cultural and religious beliefs preclude using these sites for housing. In many cases, sufficient tribal land exists for housing, but environmental restrictions prohibit the use of much of it for housing. The Urban Institute's survey of IHAs revealed that, overall, wetlands restrictions, water quality considerations, and contaminated soils add to the cost of housing in tribal areas. In the Western desert, once low-income housing is developed, the severity of the climate can complicate maintenance. The effects of high salt and mineral content in the water and soil were evident at the Gila River Housing Authority, causing damage to water heaters and copper and cast iron pipes. The executive director told us that the average life of a hot water heater costing $300 is about 6 months. To remedy the corrosion to plumbing, the IHA has begun placing plumbing in ceilings and converting to plastic piping. Also, the water's high mineral content damages the water circulation systems of large fans called "swamp coolers," used for summer cooling. The executive director told us that because of calcium buildup, the IHA must replace the coolers annually. He also explained that because of the soil's high salt content, housing foundations and sewer systems also deteriorate more rapidly than in more benign environments. Certain statutes, including the Indian Self-Determination and Education Assistance Act and the Davis-Bacon Act, are intended to protect and provide opportunities for specific groups. However, IHA officials and HUD officials whom we contacted believe that these statutes can make developing housing in tribal areas more costly because they have the effect of raising the cost of labor over local wage rates or restricting the supply of labor. The Indian Self-Determination and Education Assistance Act of 1975 requires IHAs to award contracts and subcontracts to Indian organizations and Indian-owned economic enterprises. IHA executive directors find that implementing the act's requirement is difficult and believe that the regulations add to contractors' time and costs to bid on work for IHAs. The officials said that factors that undermine the requirement include a lack of qualified Indian contractors in the area, the creation of fraudulent joint ventures that are not owned or managed by Indians, and the occasional need to use qualified firms outside the region that do not understand local conditions. Under the Davis-Bacon Act, firms that contract with IHAs for housing development must pay wages that are no less than those prevailing in the local area. However, HUD officials told us that this requirement generally increases IHAs' costs of developing housing in tribal areas. The costs increase because the applicable Davis-Bacon wage rate is often based on wage surveys done by HUD of large unionized contractors based in larger metropolitan areas, and the rate is therefore about $10.00 per hour higher than the rate prevailing in the local tribal area. Officials of the Chemehuevi IHA in Havasu Lake, California, told us that because of high Davis-Bacon wage rates, their cost to develop a single-family home ranges between $85,000 and $98,000. Using the prevailing rate of approximately $6.50 to $8.00 per hour, they estimate the development cost to be between $65,000 and $80,000. If housing units are abused through neglect or vandalism and not regularly maintained, costly major repairs can be needed. These avoidable repairs put pressure on maintenance budgets that are shrinking because a high percentage of rents are unpaid in tribal areas. Moreover, maintaining assisted housing for Native Americans is an increasingly difficult challenge because of its age--44 percent of the units were built in the 1960s and 1970s. For housing units in HUD's Rental Housing Program for Native Americans, the Urban Institute reported that 65 percent of the IHA officials responding to its telephone survey identified tenants' abuse and the vandalism of vacant homes as the factors contributing most to maintenance costs. For units under the Mutual Help Program (which are owned or leased by the residents), the Urban Institute reported that, according to IHA officials, residents' neglect to perform needed maintenance accounted for 30 percent of the poor physical conditions associated with this segment of the housing stock. Our discussions with IHA officials reinforce these findings. The executive director at the Gila River Housing Authority told us that vandalism by juveniles was a major problem for him and that because the tribal area borders Phoenix, Arizona, it is more susceptible to gang activity and violence. Chemehuevi IHA officials pointed out that once a family that has neglected to perform expected maintenance moves out and the tribe turns the housing back to the IHA, the IHA often incurs a large and unexpected rehabilitation cost before it can lease the unit to another family. The high level of unpaid rent among assisted Native American families has exacerbated the problem of accomplishing needed maintenance. Routine and preventive maintenance is an operating expense that an IHA pays for out of rental income and an operating subsidy that HUD provides to help defray expenses. However, according to HUD, appropriations for these subsidies have not been sufficient to cover all operating expenses not covered by rental income. Therefore, shortfalls in rental income generally mean fewer funds to spend on maintenance. In recent years, these shortfalls have been at high levels for both the Rental Housing and the Mutual Help programs. For example, the Urban Institute reported that at the end of 1993, 36 percent of all tenants in the rental program were delinquent in their rent payments. In contrast, the average delinquency rate in public housing is only 12 percent. To counter shortfalls in rental income, some IHAs enforce strong eviction policies. Others, however, are either unwilling or unable to do so. The IHAs attributed the ineffectiveness of their policies to such factors as tribal court systems that do not support evictions, the conflict of such policies with tribal culture, and their own lack of forceful management. Regardless of the reason, these shortfalls coupled with insufficient operating subsidies likely will lead to deferred maintenance and higher costs for major repairs in the future. In December 1996, the Seattle Times reported a series of articles describing the possible mismanagement and misuse of federal funds by Indian housing authorities. The articles covered 29 instances of questionable performance and in many cases suggested that more effective oversight by HUD could have precluded or mitigated the mismanagement at the housing authority. HUD's IG found that most of the Times reports were accurate, including reports of Indian housing authorities using federal funds to build luxury homes for families with incomes that exceeded the program's eligibility criterion and reprogramming significant federal funds from one purpose to another without HUD's approval. Although HUD has a system to identify poorly performing Indian housing authorities, our work showed that this system did not detect, for the most part, mismanagement by the authorities as reported in the Times. This lack of detection was because HUD's system focuses primarily on authorities assessed as having a high risk of mismanagement. Furthermore, HUD had not assessed those authorities named in the Times as "high risk." Not having an effective oversight tool could be problematic for HUD, depending on the regulations that are negotiated to implement new Indian housing legislation taking effect in October 1997. HUD field office staff rely on their Risk Assessment and Determination of Resources (RADAR) system to identify "high risk" IHAs. These are the IHAs whose management demonstrates weaknesses that could lead to the misuse of federal funding. The RADAR system uses performance and environmental factors to assess an IHA's management risks and HUD field staff rely on it to determine where they will allocate their scarce monitoring resources, contract for intensive on-site technical assistance, and focus their training for HUD's Partners in Progress (PIP) program--a technical assistance program for IHAs with long-standing operating difficulties. HUD staff score Indian authorities on the basis of their funding levels, management control and operating procedures, and compliance with regulations. These scores form the basis for HUD staff to assess the IHA's risk of mismanaging federal funds. One of the most important factors that RADAR uses to identify poorly performing IHAs is on-site monitoring that provides information about an IHA's performance and verifies the accuracy of the data submitted by the IHA. At two of the HUD field offices we visited, however, restrictions on the on-site monitoring of IHAs have resulted in a lack of assurance about the conditions that existed at the IHAs. These field offices account for nearly half of all IHAs. In addition, the staff at the offices we visited believed that their knowledge of IHAs' operations was insufficient and that they do not know enough to accurately assess the IHAs with the RADAR system. Because of this overall lack of assessment in accordance with the RADAR system, and because HUD had not assessed most of the IHAs cited in the Seattle Times articles as high risk, HUD staff were not able to detect inappropriate activities if they occurred. In 1996, the Congress enacted legislation that will change significantly the way that Indian housing is funded and overseen. Under the Native American Housing and Self-Determination Act of 1996, HUD will begin in October 1997 to provide directly to Indian tribes, or their designated recipients, block grants to carry out affordable housing activities. To qualify for the grants, tribes must submit to HUD annual plans and 5-year plans that provide statements of the tribes' needs and resources available to address those needs. In addition, tribes must submit annual performance reports that describe the accomplishments of the prior year and describe how the tribe would change its program as a result of its experiences. HUD, in turn, is required to conduct a limited review of each Indian housing plan to ensure that the plan complies with the various criteria outlined in the act and review the performance reports to determine whether they are accurate. Among the act's requirements are that tribes include in their housing plans descriptions of the housing needs of low-income families and of how the geographic distribution of assistance is consistent with the needs for various types of housing assistance. In addition, the plans are to include detailed descriptions of the affordable housing resources available in the tribes' jurisdictions and of how various government and private entities will coordinate these resources. For example, the plan is to describe how the tribe will coordinate its resources with those of tribal and state welfare agencies to ensure that the residents of such housing will have access to assistance in obtaining employment and achieving self-sufficiency. These plans and the year-end performance report are significant undertakings and are meant to ensure that federal funds are used effectively to meet the needs of low-income families. HUD is now engaged in a negotiated rulemaking with Indian tribes and their representatives to develop a structure under which both the tribes and HUD can comply with the new Indian housing law. Until these regulations are approved and implemented, it is unclear how HUD's oversight of Native American programs will change and whether HUD can effectively provide such oversight with its current systems and resources. Messrs. Chairmen, this concludes our testimony. We would be pleased to answer questions that you or Members of the Committees 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. 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 Department of Housing and Urban Development's (HUD) Native American housing programs, focusing on the: (1) funding history and results of HUD's housing programs for Native Americans; (2) factors that complicate and make costly the development and maintenance of affordable housing for Native Americans; and (3) HUD's ability to detect mismanagement in Native American housing and the potential impact of the recently enacted Native American Housing Assistance and Self-Determination Act of 1996 on HUD's oversight of Native American housing. GAO noted that: (1) from fiscal year (FY) 1986 through FY 1995, HUD provided $4.3 billion (constant 1995 dollars) for housing and community development in tribal areas; (2) of this amount, HUD provided $3.9 billion to approximately 189 Native American housing authorities to develop and maintain affordable housing and assist low-income renters; (3) in this period, the authorities used the funds to construct over 24,000 single-family homes, operate and maintain existing housing, and encourage other development; (4) over the decade, HUD also has provided direct block grants totalling over $424 million (constant 1995 dollars) to eligible tribes for community development and mortgage assistance; (5) many factors complicate and make costly the development and maintenance of affordable housing for Native Americans; (6) these factors include the remoteness and limited human resources of many Native American housing authorities and the Native American communities they serve, land-use restrictions and the inhospitality of the land, the difficulty that contractors and Native American housing authorities have in complying with statutory requirements to give hiring preference to Native Americans, and the vandalism and neglect that make heavy demands on the scarce maintenance funds available to Native American housing authorities; (7) in December 1996, the Seattle Times reported 29 instances of possible mismanagement or misuse of federal funds by Native American housing authorities; (8) for example, the Times reported that Native American housing authorities used federal funds to build luxury homes, covered the mismanagement of one federal grant with funds from another grant, and reprogrammed large federal grants without HUD's approval; (9) HUD's Inspector General found that most of these reports were accurate; (10) GAO's work found that HUD does not effectively apply its system for alerting it to poorly performing Native American housing authorities across its Native American Programs field offices; (11) as a result, HUD may not be able to detect additional instances of mismanagement or misuse of funding; and (12) futhermore, HUD's approach to overseeing Native American housing may change, depending on regulations now being developed to implement the new Native American housing legislation.
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As the lead federal agency for maritime homeland security within the Department of Homeland Security, the Coast Guard is responsible for homeland and nonhomeland security missions, including ensuring security in ports and waterways and along coastlines, conducting search and rescue missions, interdicting drug shipments and illegal aliens, enforcing fisheries laws, and responding to reports of pollution. The deepwater fleet, which consists of 186 aircraft and 88 cutters of various sizes and capabilities, plays a critical role in all of these missions. As shown in table 1, the fleet includes fixed-wing aircraft, helicopters, and cutters of varying lengths. Some Coast Guard deepwater cutters were built in the 1960s. Notwithstanding extensive overhauls and other upgrades, a number of the cutters are nearing the end of their estimated service lives. Similarly, while a number of the deepwater legacy aircraft have received upgrades in engines, operating systems, and sensor equipment since they were originally built, they too have limitations in their operating capabilities. In 1996, the Coast Guard began developing what came to be known as the Integrated Deepwater System acquisition program as its major effort to replace or modernize these aircraft and cutters. This Deepwater program is designed to replace some assets--such as deteriorating cutters--with new cutters and upgrade other assets--such as some types of aircraft--so they can meet new performance requirements. The Deepwater program represents a unique approach to a major acquisition in that the Coast Guard is relying on a prime contractor--the system integrator--to identify and deliver the assets needed to meet a set of mission requirements the Coast Guard has specified. In 2002, the Coast Guard awarded a contract to Integrated Coast Guard Systems (ICGS) as the system integrator for the Deepwater program. ICGS has two main subcontractors--Lockheed Martin and Northrop Grumman--who in turn contract with other subcontractors. The resulting program is designed to provide an improved, integrated system of aircraft, cutters, and unmanned aerial vehicles to be linked effectively through systems that provide command, control, communications, computer, intelligence, surveillance, reconnaissance, and supporting logistics. We have been reviewing the Deepwater program for several years. In recent reports we have pointed out difficulties the Coast Guard has been having in managing the Deepwater program and ensuring that the acquisition schedule is up to date and on schedule. The existing schedule calls for acquisition of new assets under the Coast Guard's Deepwater program to occur over an approximately 20-year period. By 2007, for example, the Coast Guard is to receive the first National Security Cutter, which will have the capability to conduct military missions related to homeland security. Plans call for 6 to 8 of these cutters to replace the 12 existing 378-foot cutters. However, in order to carry out its mission effectively, the Coast Guard will also need to keep all of the deepwater legacy assets operational until they can be replaced or upgraded. Coast Guard condition measures show that the deepwater legacy assets generally declined between 2000 and 2004, but the Coast Guard's available condition measures are inadequate to capture the full extent of the decline in the condition of deepwater assets with any degree of precision. Other evidence we gathered, such as information from discussions with maintenance personnel, point to conditions that may be more severe than the available measures indicate. The Coast Guard acknowledges that it needs better condition measures but has not yet finalized or implemented such measures. During fiscal years 2000 through 2004, the Coast Guard's various condition measures show a general decline, although there were year-to-year fluctuations (see table 2). For deepwater legacy aircraft, a key summary measure of the condition--the availability index (the percentage of time aircraft are available to perform their missions)--showed that except for the HU-25 medium-range surveillance aircraft, the assets continued to perform close to or above fleet availability standards over the 5-year period. In contrast, other condition measures for aircraft, such as cost per flight hour and labor hours per flight hour, generally reflected some deterioration. For cutters, a key summary measure of condition--percent of time free of major casualties--fluctuated but generally remained well below target levels. The number of major casualties generally rose from fiscal years 2000 through 2003 and then dropped slightly in fiscal year 2004. Another, albeit less direct, measure of an asset's condition is deferred maintenance--the amount of scheduled maintenance that must be postponed on an asset in order to pay for unscheduled repairs. Such deferrals can occur when the Coast Guard does not have enough money to absorb unexpected maintenance expenditures and still perform all of its scheduled maintenance, thus creating a backlog. For example, in spring 2004, while on a counter-drug mission, the 210-foot cutter Active experienced problems in the condition of its flight deck that were to be corrected during its scheduled depot-level maintenance. However, because of a lack of funding, the maintenance was deferred and the flight deck not repaired. As a result, the cutter lost 50 percent of its patrol time, since the required support helicopters could not take off from or land on it. As table 3 shows, deferred maintenance does not show a clear pattern across all classes of deepwater legacy assets. For the deepwater legacy aircraft, the overall amount of estimated deferred maintenance increased each year during fiscal years 2002 through 2004, from $12.3 million to about $24.6 million. However, most of the increase came from one type of asset, the HH-60 helicopter, and was mainly the result of shortening the interval between scheduled depot-level maintenance from 60 months to 48 months--thereby increasing the scheduled maintenance workload--and not from having to divert money to deal with unscheduled maintenance. For the deepwater cutters, the amount of estimated deferred maintenance increased from fiscal year 2002 to 2003, but then dropped significantly in fiscal year 2004. The decrease in fiscal year 2004 came mainly because (1) the Coast Guard ceased maintenance on an icebreaker, thus freeing up some maintenance funds; and (2) the Coast Guard also received supplemental operational and maintenance funding, allowing it to deal with both scheduled and unscheduled maintenance. Thus, the drop in the estimate of deferred maintenance costs for fiscal year 2004 is not necessarily an indicator that the condition of the legacy assets was improving; it could result from the Coast Guard having more money to address the maintenance needs. At the time we began our work, the Coast Guard's condition measures were not sufficiently robust to systematically link assets' condition with degradation in mission capabilities. As we discussed with Coast Guard officials, without such condition measures, the extent and severity of the decline in the existing deepwater legacy assets and their true condition cannot be fully determined. As a result, the picture that emerges regarding the condition of the deepwater legacy assets based on current Coast Guard condition measures should be viewed with some caution. While there is no systematic, quantitative evidence sufficient to demonstrate that deepwater legacy assets are nearing a "train wreck," this does not mean the assets are in good condition or have been performing their missions safely, reliably and at levels that meet or exceed Coast Guard standards. We identified two factors that need to be considered to put these condition measures in proper context. The first factor deals with limitations in the measures themselves. Simply put, the Coast Guard's measures of asset condition do not fully capture the extent of the problems. As such, they may understate the decline in the legacy assets' condition. More specifically, Coast Guard measures focus on events, such as flight mishaps or equipment casualties, but do not measure the extent to which these and other incidents degrade mission capabilities. Here are two examples in which the Coast Guard's current measures are not sufficiently robust to systematically capture degradation in mission capabilities: The surface search radar system on the HC-130 long-range surveillance aircraft, called the APS-137 radar, is subject to frequent failures and is quickly becoming unsupportable. Flight crews use this radar to search for vessels in trouble and to monitor ships for illegal activity, such as transporting illicit drugs or illegal immigrants. When the radar fails, flight crews are reduced to looking out the window for targets, greatly reducing mission efficiency and effectiveness. A flight crew in Kodiak, Alaska, described this situation as being "like trying to locate a boat looking through a straw." Mission capability degradations such as these are not reflected in the Coast Guard's current condition measures. The 378-foot cutter Jarvis recently experienced a failure in one of its two main gas turbines shortly after embarking on a living marine resources and search and rescue mission. While Jarvis was able to accomplish its given mission, albeit at reduced speeds, this casualty rendered the cutter unable to respond to any emergency request it might have received--but did not in this case--to undertake a mission requiring higher speeds, such as drug interdiction. The Coast Guard condition measures are not robust enough to capture these distinctions in mission capability. The second factor that needs to be kept in mind is the compelling nature of the other evidence we gathered outside of the Coast Guard's condition measures. This evidence, gleaned from information collected during our site visits and discussions with maintenance personnel, showed deteriorating and obsolete systems and equipment as a major cause of the reduction in mission capabilities for a number of deepwater legacy aircraft and cutters. Such problems, however, are not captured by the Coast Guard's condition measures. One example of this involves the HH-65 short-range recovery helicopter. While this helicopter consistently exceeded availability standards established by the Coast Guard over the 5- year period we examined, it is currently operating with underpowered engines that have become increasingly subject to power failures. As a result, Coast Guard pilots employ a number of work arounds, such as dumping fuel or leaving the rescue swimmer on scene if the load becomes too heavy. Further, because of increasing safety and reliability problems, the Coast Guard has also implemented a number of operational restrictions--such as not allowing the helicopter to land on helipads--to safeguard crew and passengers and prevent mishaps until all of the fleets' engines can be replaced. The Coast Guard has recently recognized the need for improved measures to more accurately capture data on the extent to which its deepwater legacy assets are degraded in their mission capabilities, but as of March 2005, such measures have not yet been finalized or implemented. Subsequent to our inquiries regarding the lack of condition and mission capability measures, Coast Guard naval engineers reported that they had begun developing a "percent of time fully mission capable" measure to reflect the degree of mission capability, as well as measures to track cutter readiness. We agree that measures like this are needed--and as soon as possible. Further, current plans call for the measure, if approved, to be used for cutters, but not for aircraft. Consequently, even if this measure were to be implemented across the Coast Guard, there would still be no measure to address degradation in mission capabilities for aircraft. We will be exploring this issue further in our follow-on report. The Coast Guard has taken several actions to address maintenance issues and upgrades for its deepwater legacy assets. These include establishing a compendium of information for making decisions regarding maintenance and upgrades, performing more extensive maintenance between deployments, and, at the Pacific Area Command, applying new business rules and strategies to better sustain the 378-foot high-endurance cutters through 2016. These additional efforts are likely helping to prevent a more rapid decline in the condition of these assets, but condition problems continue, and the efforts will likely involve additional costs. Since 2002, the Coast Guard has annually issued a Systems Integrated Near Term Support Strategy compendium. Among other things, this compendium consolidates information needed to make planning and budgeting decisions regarding maintenance and upgrades to sustain legacy assets. Its purpose is to serve as a tool for senior Coast Guard management in setting priorities and planning budgets. From this strategic document, the Coast Guard has identified a number of upgrades to improve the capabilities of the deepwater legacy aircraft and cutters. The most recent compendium (for fiscal year 2006) lists more than $1 billion worth of upgrades to the deepwater legacy assets. The planned upgrades identified in the compendium that have been approved and received initial funding account for an estimated $856 million the Coast Guard anticipates it will need to complete those projects. The approved upgrades for deepwater legacy assets are shown in table 4. Among the projects already begun is the re-engining of the HH-65 helicopters to increase the helicopter's power and capabilities. The Coast Guard is also upgrading several other aviation systems in an effort to improve aircraft capabilities. Enhancements are also planned for certain classes of deepwater cutters. For example, during this fiscal year, the Coast Guard is to begin a maintenance effectiveness project on the 210- foot and 270-foot cutters. This project includes replacing major engineering subsystems with the goal of extending the cutters' service lives until their replacement by the Offshore Patrol Cutter. Of the $856 million total estimated costs needed for the planned upgrades to the deepwater legacy assets listed above, the Coast Guard has received $215 million through fiscal year 2005 and has requested another $217.3 million in its fiscal year 2006 budget. The remaining estimated costs of $423.7 million would have to be funded beyond fiscal year 2006. Coast Guard personnel consistently reported to us that crewmembers have to spend increasingly more time between missions to prepare for the next deployment. For example, to prevent further corrosion-related problems, air station maintenance personnel at the locations we visited said they have instituted additional measures, such as washing and applying fluid film to the aircraft prior to each deployment. Similar accounts were told by personnel working on cutters. For example, officers of the 270-foot cutter Northland told us that because of dated equipment and the deteriorating condition of its piping and other subsystems, crewmembers have to spend increasingly more time and resources while in port to prepare for their next deployment. While we could not verify these increases in time and resources because the Coast Guard does not capture data on these additional maintenance efforts, the need for increasing amounts of maintenance was a message we consistently heard from the operations and maintenance personnel with whom we met. Such efforts are likely helping to prevent a more rapid decline in the condition of these deepwater legacy assets, but it is important to note that even with the increasing amounts of maintenance, these assets are still losing mission capabilities because of deteriorating equipment and system failures. For example, in fiscal year 2004, one 378-foot cutter lost 98 counterdrug mission days because of a number of patrol-ending casualties--including the loss of ability to raise and lower boats and run major electrical equipment--requiring $1.2 million in emergency maintenance. Another 378-foot cutter lost 27 counterdrug mission days in the fall of 2004 when it required emergency dry-dock maintenance because of hydraulic oil leaking into the reduction gear. One effort is under way at the Coast Guard's Pacific Area Command to improve maintenance practices for the 378-foot cutters. Pacific Area Command officials have recognized that a different approach to maintaining and sustaining legacy cutters may be needed and, as a first step, they have undertaken an initiative applying what they refer to as "new business rules and strategies" to better maintain the 378-foot high- endurance cutters through 2016. Under the original Deepwater proposal, the final 378-foot cutter was to be decommissioned in 2013, but by 2005, that date had slipped to 2016. To help keep these cutters running through this date, Pacific Area Command officials are applying such rules and strategies as (1) ensuring that operations and maintenance staffs work closely together to determine priorities, (2) recognizing that maintaining or enhancing cutter capabilities will involve trade-off determinations, and (3) accepting the proposition that with limited funding not all cutters will be fully capable to perform all types of missions. Pacific Area Command officials believe that in combination, these principles and strategies will result in more cost-effective maintenance and resource allocation decisions--recognizing that difficult decisions will still have to be made to balance maintenance and operations. The Pacific Area Command's new initiative has the potential for assisting the Coast Guard in making more informed choices regarding the best use of their resources, but the approach will likely require additional funding. In particular, the Pacific Area Commander told us that in order for the 378- foot cutters to be properly maintained until their replacements become operational; the Coast Guard will have to provide additional funding for sustaining the 378-foot cutters. So far, the Coast Guard's budget plans or requests do not address this potential need. Since the inception of the Deepwater program, we have expressed concerns about the degree of risk in the acquisition approach and the Coast Guard's ability to manage and oversee the program. Last year, we reported that, well into the contract's second year, key components needed to manage the program and oversee the system integrator's performance had not been effectively implemented. We also reported that the degree to which the program was on track could not be determined because the Coast Guard was not updating its schedule. We detailed needed improvements in a number of areas, shown in table 5. These concerns have a direct bearing on any consideration to increase the program's pace. Because the Coast Guard was having difficulty managing the Deepwater program at the pace it had anticipated, increasing the pace by attempting to speed the acquisition would only complicate the problem. The Coast Guard agreed with nearly all of our recommendations and has made progress in implementing some of them. In most cases, however, while actions are under way, management challenges remain that are likely to take some time to fully address. We have seen mixed success in the Coast Guard's efforts to improve management of the program and contractor oversight. All four areas of concern--improving integrated project teams (IPT), ensuring adequate staff for the program, planning for human capital requirements for field units receiving new assets, and updating the program's schedule--have yet to be fully addressed. Although the Deepwater program has made some efforts to improve the effectiveness of IPTs, we continue to see evidence that more improvements are needed for the teams to effectively do their jobs. These teams, the Coast Guard's primary tool for managing the program and overseeing the contractor, are generally chaired by a subcontractor representative and consist of members from subcontractors and the Coast Guard. The teams are responsible for overall program planning and management, asset integration, and overseeing delivery of specific Deepwater assets. Since our March 2004 report, the teams have been restructured, and 20 teams have charters setting forth their purpose, authority, and performance goals. And new, entry-level training is being provided to team members. Despite this progress, however, the needed changes are not yet sufficiently in place. A recent assessment by the Coast Guard of the system integrator's performance found that roles and responsibilities in some teams continue to be unclear. Decision making is to a large extent stovepiped, and some teams still lack adequate authority to make decisions within their realm of responsibility. One source of difficulty for some team members has been the fact that each of the two major subcontractors has used its own databases and processes to manage different segments of the program. Decisions on air assets are made by Lockheed Martin, while decisions regarding surface assets are made by Northrop Grumman. This approach can lessen the likelihood that a "system of systems" outcome will be achieved. Officials told us that more attention is being paid to taking a systemwide approach and that the Coast Guard has emphasized the need to ensure that the two major subcontractors integrate their management systems. The Coast Guard has taken steps to more fully staff the Deepwater program, with mixed effects. In February 2005, the Deepwater program executive officer approved a revised human capital plan. The plan emphasizes workforce planning, including determining needed knowledge, skills, and abilities and developing ways to leverage institutional knowledge as staff rotate out of the program. This analysis is intended to help determine what gaps exist between needed skills and existing skills and to develop a plan to bridge these gaps. The Coast Guard has also taken some short-term steps to improve Deepwater program staffing, hiring contractors to assist with program support functions, shifting some positions from military to civilian to mitigate turnover risk, and identifying hard-to-fill positions and developing recruitment plans specifically for them. Finally, the Deepwater program and the Coast Guard's acquisition branch are now working on an automated system for forecasting military rotation cycles, a step Deepwater officials believe will help with long- range strategic workforce planning and analysis. Despite these actions, however, vacancies remain in the program, and some metrics that may have highlighted the need for more stability in the program's staff have been removed from the new human capital plan. As of January 2005, 244 positions were assigned to the program, but only 206 of these were filled, a 16 percent vacancy rate. A year ago, 209 staff were assigned to the program. Further, the new human capital plan removes a performance goal that measured the percentage of billets filled at any given time. Coast Guard officials acknowledged that the prior plan's goal of a 95 percent or higher fill rate was unduly optimistic and was a poor measure of the Coast Guard's ability to meet its hiring goals. For example, billets for military personnel who plan to rotate into the program in the summer are created at the beginning of the budget year, leading the metric to count those positions as vacant from the beginning of the budget year until summer. Other performance metrics that were included in the prior plan to measure progress in human capital issues have also been removed. For example, to help ensure that incoming personnel received acquisition training and on-the-job training, a billet was included in the prior plan to serve as a floating training position that replacement personnel could use for a year before the departure of military incumbents. This position was never funded, and the new plan removes the billet. The Coast Guard recognizes the critical need to inform the operators who are to use the Deepwater assets of progress in the program, and officials stated that, on the basis of our recommendations, they have made a number of improvements in this area. A November 2004 analysis of the Deepwater program's communication process, conducted in coordination with the National Graduate School, found that the communication and feedback processes were inadequate. Emphasis has now been placed on outreach to field personnel, with a multipronged approach involving customer surveys, face-to-face meetings, and presentations. We have not yet evaluated the effectiveness of the new approach. Human capital requirements for the Deepwater program--such as crew numbers and schedules, training, and support personnel--will have an increasing impact on the program's ability to meet its goals as the pace at which assets are delivered to field units picks up. Recent assessments by Coast Guard performance monitors show this to be an area of concern. Coast Guard officials have expressed concern about whether the system integrator is appropriately considering human capital in systems engineering decisions. The system integrator is required to develop a workforce management plan for Deepwater, as well as "human factors engineering" plans for each Deepwater asset and for the overall system of systems. The Coast Guard rejected the contractor's workforce management plan and several of the proposed human factors engineering plans as being inadequate. The rejections were due, in part, to the lack of an established and integrated system-level engineering approach that shows how issues relating to human capabilities and limitations of actually performing with the system will be approached. One performance monitor noted that, as of late 2004, requirements for staffing and training of maintenance facilities and organizations had yet to be determined. According to the Coast Guard, emphasis on a contractor's approach to addressing human capital considerations is necessary to ensure that Deepwater goals are met, especially as they pertain to operational effectiveness and total ownership cost. The Coast Guard has recently undertaken efforts to update the original 2002 Deepwater acquisition schedule--an action that we suggested in our June 2004 report. The original schedule had milestone dates showing when work on an asset would begin and when delivery would be expected, as well as the integrated schedules of critical linkages between assets, but we found that the Coast Guard was not maintaining an updated and integrated version of the schedule. As a result, the Coast Guard could not demonstrate whether individual components and assets were being integrated and delivered on schedule and in critical sequence. As recently as October 2004, Deepwater performance monitors likewise expressed concern that the Coast Guard lacked adequate visibility into the program's status and that lack of visibility into the schedules for component-level items prevented reliable forecasting and risk analysis. The Coast Guard has since taken steps to update the outdated schedule, and has indicated that it plans to continue to update the schedule each month for internal management purposes, and semiannually to support its budget planning efforts. We think this is an important step toward improving the Coast Guard's management of the program because it provides a more tangible picture of progress, as well as a baseline for holding contractors accountable. We will continue to work closely with the Coast Guard to ensure progress is made and to monitor how risks are mitigated. We have seen progress in terms of the rigor with which the Coast Guard is periodically assessing the system integrator's performance, but concerns remain about the broader issues of accountability for achieving the overarching goals of minimizing total ownership costs and maximizing operational effectiveness. Improvements continue to be made to the criteria for assessing the system integrator's performance. In March 2004, we reported that the process for assessing performance against specific contract tasks lacked rigor. The criteria for doing so have since been revised to more clearly reflect those that are objective, (that is, measured through automated tools against established metrics), and those that are subjective, meaning the narrative comments by Coast Guard performance monitors. Weights have been assigned to each set of evaluation factors, and the Coast Guard continues to refine the distribution of the weights to reach an appropriate balance between automated results and the eyewitness observations of the performance monitors. Coast Guard officials told us that they have also provided additional guidance and training to performance monitors. We found that efforts have been made to improve the consistency of the format used for their input in assessments of the system integrator's performance. Coast Guard officials said that they are continuing to make improvements to ensure that performance monitors' relevant observations are appropriately considered in making award fee determinations. It is important to note that although performance monitor comments are considered subjective, they are valuable inputs to assessing the system integrator's performance, particularly when they are tied to measurable outcomes. It will be necessary for the Coast Guard to continue refining the award fee factors as the program progresses. In some cases, we noted that the performance monitors' assessments differed vastly from the results of automated, data-driven assessments. For example, while schedule management is discussed in the Coast Guard's most recent assessment of the system integrator's performance as a major area of challenge and risk, the objective measure showed 100 percent compliance in this area. Another metric assesses the extent to which integrated product teams consider the impact of their decisions on the overall cost and effectiveness of the Deepwater program. Performance monitors reported that because system-level guidance had not been provided to the teams responsible for specific assets, they had a limited ability to see the whole picture and understand the impact of decisions on total ownership costs and operational effectiveness. However, the automated measure was again 100 percent compliance. Coast Guard officials said that, in some cases, the data-driven metrics do not accurately reflect the contractor's performance. For the next award fee assessment, Deepwater officials plan to revise the metrics and place more weight on the performance monitors' input, while ensuring that it is based on measurable outcomes. Changes have been made to the award fee metrics that place additional emphasis on the system integrator's responsibility for making integrated project teams effective. Award fee criteria now incorporate specific aspects of how the integrator is managing the program, including administration, management commitment, collaboration, training, and empowerment of these teams. However, as discussed above, concerns remain about whether the teams are effectively accomplishing their goals. While the Coast Guard has developed models to measure the system integrator's performance in operational effectiveness and total ownership costs, concrete results have not yet emerged. Minimizing total ownership costs and maximizing operational effectiveness are two of the overarching goals of the Deepwater program. The system integrator's performance in these two areas will be a critical piece of information when the Coast Guard makes a decision about whether to award the contractor the first contract option period of 5 years. Initial decision making is to start next year. With regard to the operational effectiveness of the program, measuring the system integrator's impact has yielded limited results to date because few of the new assets are operational. The Coast Guard has developed modeling capabilities to simulate the effect of the new capabilities on its ability to meet its missions. However, until additional assets become operational, progress toward this goal will be difficult to determine. With regard to total ownership costs, the Coast Guard does not plan to implement our recommendation. It has not adhered to its original plan, set forth in the Deepwater program management plan, of establishing as its baseline a cost not to exceed the dollar value of replacing the assets under a traditional approach (e.g., on an asset-by-asset basis rather than a system-of-systems approach). Although a cost baseline consistent with the program management plan's approach was initially established, this number has not been rebaselined, as has the system integrator's cost estimate baseline, and is not being used to evaluate the contractor's progress in holding total ownership costs down. In practice, the baseline being used to measure total ownership cost is the system integrator's own cost estimate. As we reported in March 2004, we believe that measuring the system integrator's cost growth compared with its own cost proposal will tell the government nothing about whether it is gaining efficiencies by turning to the system of systems concept. Coast Guard officials stated that the contract total ownership cost and operational effectiveness baseline is adjusted based on approved decision memorandums from the Agency Acquisition Executive, the Vice Commandant of the Coast Guard. The Coast Guard reported taking steps to address our recommendations concerning cost control through competition. Our recommendations pertained to competition among second-tier suppliers and notification of "make" decisions. Competition among second-tier suppliers. Coast Guard officials told us that in making the decision about whether to award the first contract option, the government will specifically examine the system integrator's ability to control costs by assessing the degree to which competition is fostered at the major subcontractor level. The evaluation will consider the subcontractors' project management structure and processes to control costs, as well as how market surveys of similar assets and major subsystems are implemented. The Coast Guard is focusing its attention on those areas that were priced after the initial competition for the Deepwater contract was completed, such as the HH-65 re-engining and the C-130J missionization. For example, a new process implemented for the C-130J missionization was a requirement for competition in subcontracting and government approval of all subcontracts exceeding $2 million in order for the Coast Guard to monitor the integrator's competition efforts. Notification of make decisions. According to the Federal Acquisition Regulation, the prime contractor is responsible for managing contract performance, including planning, placing, and administering subcontracts as necessary to ensure the lowest overall cost and technical risk to the government. When "make-or-buy programs" are required, the government may reserve the right to review and agree on the contractor's make-or-buy program when necessary to ensure negotiation of reasonable contract prices, among other things. We recommended that the Coast Guard be notified of make decisions over $5 million in order to facilitate controlling costs through competition. We suggested the $5 million threshold because Lockheed Martin, one of the major subcontractors, considers that amount to be the threshold for considering its suppliers major. The Coast Guard has asked the system integrator, on a voluntary basis, to provide notification one week in advance of a make decision of $10 million or more based on the criteria in the Federal Acquisition Regulation. According to Coast Guard officials, to date, no make decision has exceeded $10 million since the request was made. The details implementing this recommendation have not yet been worked out, such as specifically who in the Coast Guard will monitor the subcontractors' make decisions to ensure that the voluntary agreement is complied with. Our work to date suggests the costly and important Deepwater program will need constant monitoring and management attention to successfully accomplish its goals. In this respect, we identified three points that should be kept in mind in considering how to proceed with the program. First, the need to replace or upgrade deteriorating legacy assets is considerable. While the Coast Guard lacks measures that clearly demonstrate how this deterioration affects its ability to perform deepwater-related missions, it is clear that the deepwater legacy assets are insufficient for the task. Second, although the need to replace and upgrade assets is strong, there still are major risks in the Coast Guard's acquisition approach. The cost increases and schedule slippages that have already occurred are warning signs. We will continue to work with the Coast Guard to determine how best to manage these risks so that the Deepwater missions can be accomplished in the most cost-effective way. Third, there are signs that as the Deepwater program moves ahead, the Coast Guard will continue to report more problems with sustaining existing assets, together with the attendant need for additional infusions of funding to deal with them. Some of these problems, such as those on the 378-foot cutters, are included in the compendium the Coast Guard uses to set sustainment priorities and plan budgets, but have not been funded because they pertain to assets that are among the first to be replaced. However, projects to address these problems are nevertheless likely to be needed. We will continue to work with the Coast Guard to determine if there is a more systematic and comprehensive approach to keeping the Congress abreast of the potential bill for sustaining these assets. Mr. Chairman and Members of the Subcommittee, this completes my prepared statement. I would be happy 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 Margaret Wrightson, Director, Homeland Security and Justice Issues, at (415) 904-2200, or [email protected]. Other individuals making key contributions to this testimony include Steven Calvo, Jerry Clark, Christopher Conrad, Adam Couvillion, Michele Fejfar, Geoffrey Hamilton, Julie Leetch, Michele Mackin, Christopher Miller, Stan Stenersen, and Linda Kay Willard. 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 Coast Guard began a multiyear, $19 billion to $24 billion acquisition program to replace or modernize its fleet of deepwater aircraft and cutters, so called because they are capable of operating many miles off the coast. For several years now, the Coast Guard has been warning that the existing fleet--especially cutters--was failing at an unsustainable rate, and it began studying options for replacing or modernizing the fleet more rapidly. Faster replacement is designed to avoid some of the costs that might be involved in keeping aging assets running for longer periods. This testimony, which is based both on current and past GAO work, addresses several issues related to these considerations: (1) changes in the condition of deepwater legacy assets during fiscal years 2000 through 2004; (2) actions the Coast Guard has taken to maintain and upgrade deepwater legacy assets; and (3) management challenges the Coast Guard faces in acquiring new assets, especially if a more aggressive schedule is adopted. Available Coast Guard condition measures indicate that the Coast Guard's deepwater legacy aircraft and cutters are generally declining, but these measures are inadequate to capture the full extent of the decline in the condition of deepwater assets with any degree of precision. GAO's field visits and interviews with Coast Guard staff, as well as reviews of other evidence, showed significant problems in a variety of the assets' systems and equipment. The Coast Guard has acknowledged that it needs to develop condition measures that more clearly demonstrate the extent to which asset conditions affect mission capabilities, but such measures have not yet been finalized or implemented. The Coast Guard has taken several types of actions to help keep the deepwater legacy assets operational, but these actions, while helpful, may not fully address mission capability issues and may require additional funding. For example, to help meet mission requirements, Coast Guard staff are performing more extensive maintenance between deployments, but even so, aircraft and cutters continue to lose mission capabilities. One Coast Guard command is using a new approach to help sustain the oldest class of cutters, but this approach will likely require additional funds--something not included thus far in Coast Guard budget plans or requests. If the Coast Guard adopts a more aggressive acquisition schedule, it will likely continue to face a number of challenges that have already affected its ability to effectively manage the Deepwater program. GAO has warned that the Coast Guard's acquisition strategy, which relies on a prime contractor ("system integrator") to identify and deliver the assets needed, carries substantial risks. In 2004, well into the contract's second year, key components for managing the program and overseeing the system integrator's performance had not been effectively implemented. The Coast Guard has begun addressing some problems--for example, putting more emphasis on competition as a way to control costs--but many areas have not been fully addressed. A more aggressive schedule would only heighten the risks.
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VA pays Dependency and Indemnity Compensation to surviving spouses, children, and parents. The surviving spouse of a veteran may qualify for this compensation if the veteran died on or after January 1, 1957, (1) from a service-connected disability, or (2) after being rated as totally disabled due to service-connected conditions for a continuous period of 10 years, or for at least 5 continuous years after discharge from military service. The surviving spouse of a servicemember qualifies for this compensation if the servicemember died while on active duty. Some children aged 18 and older may receive separate DIC payments if they are in school or are unable to care for themselves. Parents may receive these benefits if they were dependent on the veteran or servicemember for financial support. Veterans, servicemembers, and federal employees may receive disability benefits from various sources including VA, DOD, and the Social Security Administration. These disability benefits terminate upon the death of the disabled person. Veterans may receive disability compensation payments through VA. A veteran's qualification for, and amount of, disability compensation is not dependent on the veteran's military rank or current income. If a veteran has one or more service-connected disabilities--conditions incurred or aggravated by military service--VA assigns a disability rating. This rating is intended to represent the average earnings loss the veteran would experience in civilian occupations due to the disabling conditions. Ratings range from 0 to 100 percent, in 10 percent increments. Basic monthly payments for a veteran with a spouse range from $123 for a 10 percent rating to $2,823 for a 100 percent rating (i.e., totally disabled or unemployable). A veteran rated at 60 to 90 percent also can receive VA compensation at the 100 percent level if also determined to be unable to work. The veteran may receive additional compensation if he or she meets certain other criteria; for example, loss of a limb or requiring assistance in performing the functions of everyday living. For a veteran with a spouse, total compensation may be as much as $7,800 per month. DOD also provides disability retirement payments to servicemembers who are separated from service because they are unfit to continue to serve, provided that their disabilities were incurred in the line of duty. Some veterans may receive disability retirement pay and VA disability compensation simultaneously; for example, if their VA disability rating is 50 percent or higher. In addition, servicemembers who are enrolled in the military's life insurance program, Servicemembers' Group Life Insurance (SGLI), may also receive financial assistance for certain losses resulting from certain traumatic injuries. Disabled servicemembers receive lump-sum payments, ranging from $25,000 to $100,000, depending upon the nat the qualifying loss. Disability benefits for federal employees are provided through their retirement and workers' compensation programs, and payment amounts are generally tied to the employee's salary. The Civil Service Retirement System (CSRS) generally covers employees who began federal employment prior to 1984. The Federal Employees' Retirement System (FERS), established to eventually replace CSRS, generally covers federal employees who began their term of employment in 1984 or later. The Federal Employees' Compensation Act (FECA) provides the workers' compensation program for federal employees who suffer injuries or illnesses while on the job, or whose preexisting conditions are aggravated by their jobs. An eligible employee may elect to receive disability retirement benefits under CSRS or FERS instead of under FECA, but cannot receive both. Additionally, servicemembers and federal employees are eligible for Social Security disability benefits. As part of its Old Age, Survivors, and Disability Insurance program, the Social Security Administration pays Social Security Disability Insurance (SSDI) benefits to individuals who are unable to work. To be eligible for SSDI, an individual must have a condition that will last at least one year or will result in death, and meet certain age and work requirements, which may include military service. SSDI benefit amounts are calculated on average earnings indexed to national wage levels. SSA also pays Supplemental Security Income (SSI) to qualifying adults with limited income and resources who have disabilities or are blind, or are age 65 or older, and to children who have disabilities or are blind. In addition to DIC benefits, survivors of servicemembers and veterans can receive cash payments and other types of benefits. DOD provides a lump sum death gratuity of $100,000 to the survivors of a servicemember who dies on active duty or in training, or due to a service-related disability. DOD also provides up to $8,800 for burial expenses. The deceased may have had Servicemembers' Group Life Insurance (SGLI) coverage, which can pay surviving family members a lump sum of up to $400,000. A surviving spouse and children may also receive monthly payments after the death of an active duty or retired servicemember through the Survivor Benefit Plan (SBP). These payments equal 55 percent of the servicemember's retirement pay. In addition to cash payments, survivors may also be eligible for health care, housing assistance, and education benefits. Survivors of federal employees can receive benefits through retirement programs, workers' compensation, and life insurance. CSRS provides benefits to the surviving spouses of retired employees. The maximum CSRS survivor benefit is 55 percent of the retired employee's monthly payment. CSRS also provides payments to the survivors of covered employees who die while employed, with survivors receiving a percentage of the employee's calculated retirement annuity. FERS offers similar survivor benefits, but the maximum is 50 percent of the retired employee's monthly payment. Under FECA, the federal workers' compensation program, benefits may be provided to the survivors of federal civilian employees who die as a result of work-related injuries and illnesses. Payment amounts are based on the deceased's last salary and, unlike other federal employee programs, FECA provides additional benefits to the spouse for dependent children. A surviving spouse is eligible to receive 50 percent of the deceased's salary, or 45 percent plus 15 percent for each dependent child, up to a maximum of 75 percent. Survivors of federal employees who die of a work-related injury or disease may receive benefits under either FECA or the employee's retirement program, CSRS or FERS, but if eligible for more than one benefit, survivors typically choose the more generous FECA benefit. FECA benefits are not subject to federal income taxes. Survivors also may receive a lump sum benefit from the employee's Federal Employees' Group Life Insurance policy. Survivors may also collect Social Security benefits through the Old Age, Survivors, and Disability Insurance program. These benefits are paid to the surviving spouse, children, and dependent parents of any worker with a qualifying work history, including military servicemembers and federal employees under FERS. Survivor benefits may also be paid to the survivors of veterans and some CSRS-covered federal employees, if the veteran or federal employee had sufficient Social Security earnings credits. For the surviving spouse, eligibility for full benefits may occur at the spouse's normal retirement age, while partial benefits can be paid as early as age 60. Also, a surviving spouse can receive survivor benefits at any age if caring for a child who is receiving Social Security benefits and is younger than age 16 or disabled. Unmarried children may receive benefits if they are under age 18. For more than half the survivors who began collecting benefits in fiscal years 2004-2008, DIC replaced between 35 and 55 percent of the VA disability compensation or military pay previously paid to the veteran or servicemember. Most of the DIC recipients in this group survived a totally disabled veteran or a low- to mid-grade enlisted servicemember, such as an Army sergeant. Overall, the most common DIC recipient was a woman over the age of 50 with no minor children who was the widow of a In this most common case, the totally disabled totally disabled veteran. veteran would have received $2,823 per month in VA compensation in 20 and, after his death, the surviving spouse would have received $1,154 month--the basic flat-rate DIC payment--for a replacement rate of 41 percent. Under DIC, survivors receive benefits without regard to the veteran's or servicemember's prior income. This prior income can include VA disability compensation and military pay, which cease upon the death of the veteran or servicemember. Because DIC benefits are generally paid at the same flat rate, the replacement rate depends upon the amount of prior income. While survivors of 6 out of 10 veterans and servicemembers received 35 percent to 55 percent of prior compensation, there are examples of DIC recipients at both ends of the replacement scale (see fig. 3). On the low end of the replacement scale, for about 1 of 10 survivors DIC replaced less than 35 percent of the veteran's prior disability compensation or the servicemembers' military pay. Many were survivors of veterans who received special compensation in addition to disability compensation due to the seriousness of the disability, for example, the loss of a limb. Some of the survivors of these veterans experienced a large drop in monthly compensation. For example, a severely disabled veteran could receive as much as $7,800 per month in disability and special compensation prior to death, but the surviving spouse would receive $1,400 per month in DIC, or 18 percent of the prior amount (see fig. 4). Another group which sees a large drop is survivors of higher ranked servicemembers, such as officers. DIC's flat rate replaces less of their military pay than it does for servicemembers in lower pay grades. A Navy lieutenant, for example, earned about $6,000 per month in 2009. If the lieutenant died on active duty, the surviving spouse would receive the basic DIC benefit--$1,154--which replaces about 19 percent of the lieutenant's pay. On the high end of the replacement scale, about 3 out of 10 survivors received DIC payments that replaced more than 55 percent of previous disability compensation or military pay, with many receiving 100 percent or more of the prior compensation. Many were survivors of veterans who received relatively low VA compensation prior to their death because they were considered partially disabled. For example, a veteran with a spouse and a 30 percent rated disability received $421 per month in VA disability compensation in 2009. Upon the veteran's death, the surviving spouse received the DIC basic payment of $1,154 per month, which represented well over 200 percent of the prior compensation (see fig. 4). Some survivors of active duty servicemembers also fell into this group. Generally, these were servicemembers in lower pay grades whose survivors received additional DIC benefits to support children or parents. While DIC serves to replace some of the financial support lost due to a service-connected death, the law does not define a specific percentage of income that DIC should replace. In contrast, laws governing some other types of survivor benefits establish set replacement rate percentages. For example, a provision in federal law stipulates that most employment-based pensions must provide surviving spouses with 50 percent of the deceased's pension payment, unless both the employee and spouse opt out. However, DIC is not a pension program, and there is no consensus among experts on an adequate or ideal replacement ratio for survivors. The amount paid by DIC to survivors of disabled veterans and servicemembers is generally higher than the amount paid by CSRS and FERS retirement programs to survivors of comparably paid federal employees. Such comparisons are difficult, however, because DIC provides a flat rate payment while CSRS and FERS survivor payments are determined by the salary and years of employment of the deceased employee. As a result, there is a range of payment amounts for survivors of federal employees. The monthly payment to a survivor of a federal employee with more years on the job and a higher salary will be larger than that to a survivor of a federal employee with fewer years or a lower salary. When we looked at veterans/servicemembers and federal employees with comparable pay and experience, we found that for most survivors, DIC provides higher benefits than the federal retirement programs because it gives more money to survivors of lower-paid individuals. About 82 percent of veterans or servicemembers whose survivors receive DIC were lower ranked during their time of service. Personnel in these lower ranks made less than $63,000 a year in 2009, and their survivors would have fared better under the DIC program than they would have under the federal retirement survivor programs. The following examples illustrate how DIC generally provides higher payments to the survivors of those who die after a period of disability than CSRS for a majority of its recipients. Under DIC, the surviving spouse of an Army sergeant who was disabled for a prolonged period before dying in 2009 would be eligible for a monthly payment of $1,400. In contrast, the surviving spouse of a federal employee, also disabled before his or her death and with the same years of experience and salary as the Army sergeant, would be eligible for a monthly CSRS payment of $606. The surviving spouses of a private first class, a sergeant first class, and a captain would also receive higher payments under DIC than would the surviving spouses of federal employees with comparable pay and experience under CSRS. Although they represent a small portion of DIC recipients, survivors of higher-paid servicemembers would likely receive less compensation than their federal employee counterparts. In 2009, for example, the survivor of an Army lieutenant colonel who was totally disabled for a prolonged period would receive the same DIC payment of $1,400 per month, but the survivor of a comparable federal employee would receive over $1,700 per month. (See fig. 5.) (See fig. 5.) The following examples illustrate how DIC generally provides higher payments than FERS for a majority of its recipients. For instance, the spouse of an Army sergeant who died in 2009 after a period of disability would receive the flat DIC payment of $1,154 a month. The spouse of a federal employee with equal pay and years of employment who died in 2009 would receive $732 a month under FERS. Similarly, the surviving spouses of a private first class and a sergeant first class would receive higher payments under DIC than the surviving spouses of comparable federal employees would under FERS. This trend generally holds true for both employees who die while employed by the government and those who die after a period of disability: DIC survivor benefits are higher than FERS for the majority of individuals. Although they represent a small portion of DIC recipients, survivors of higher-paid servicemembers may receive lower payments than their federal employee counterparts. While the spouse of a higher-paid Army captain would still receive the basic DIC payment of $1,154 per month after the captain's death in 2009, the spouse of a federal employee with equal amounts of pay and years of employment would receive nearly $1,300 under FERS. (See fig. 6.) In contrast to CSRS and FERS, DIC survivor payments are generally lower than payments to survivors of comparably paid federal employees under the federal workers' compensation program known as FECA. FECA provides survivor benefits to the families of federal employees who die as a result of injuries sustained on the job. FECA survivor payments are generally higher than those under CSRS or FERS and, like DIC, are not subject to federal income tax. A surviving spouse receives the equivalent of half the federal employee's salary at the time of death. This payment would be larger than the basic DIC payment if the employee had an ending salary of at least $27,697 in 2009. Almost all servicemembers earn more than this salary in military pay, so their survivors would receive less under DIC than their civilian federal counterparts would receive under FECA. For example, under DIC, the surviving spouse of an Army sergeant who died while on active duty would receive DIC's basic payment of $1,154 per month. The surviving spouse of a comparably paid federal employee would receive $1,722 under FECA for a death due to a work-related injury. Similarly, the spouse of a federal employee with pay comparable to an Army captain would receive over $3,000 per month under FECA compared to DIC's $1,154. (See fig. 7.) g. 7.) Survivors of both veterans/servicemembers and civilian federal employees may draw on other government benefits and additional sources of income concurrently. For example, Social Security may allow spouses of veterans, servicemembers, and federal employees to collect survivor benefits based on the deceased's employment earnings, and also may provide survivor payments to the deceased's unmarried children. In addition, past reports on DIC indicate that some DIC benefit recipients also receive survivor payments from the Survivor Benefit Plan, a survivor benefit available to those collecting a military pension. Military survivors may also receive burial assistance, and health and education benefits. Finally, survivors of both military personnel and civilian federal employees may draw income from their own employment and receive life insurance payments. We provided a draft of this report to VA for its review and comment. The agency provided comments that were technical in nature and we incorporated them as appropriate. We are sending copies of this report to relevant congressional committees, the Secretary of Veterans Affairs, and other interested parties. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-7215 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II. Our review focused on (1) the extent to which Dependency and Indemnity Compensation (DIC) replaces Department of Veterans Affairs (VA) disability compensation or active duty military pay lost due to the death of a veteran or servicemember, and (2) how DIC benefits compare to benefits for survivors of civilian federal employees. To address these objectives, we obtained and analyzed data on DIC benefits, VA disability compensation, and military pay. We also obtained information on programs that provide survivor benefits to federal employees and compared these survivor payments to DIC payments. To obtain additional context, we reviewed past evaluations of DIC and interviewed officials at VA and several organizations representing veterans, servicemembers, and their survivors. We conducted this performance audit from February 2009 to November 2009, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings based on our audit objectives. We obtained and analyzed data from VA's Benefits Delivery Network (BDN) data system on all survivors who received DIC payments in September 2008, the last month of fiscal year 2008. These data included information on individual DIC recipients, such as the recipient's age and the level of DIC payments the recipient received. To determine the extent to which DIC benefits replaced prior VA disability compensation, we obtained additional data on survivors who began receiving DIC payments during a 5-year period: fiscal years 2004-2008. Specifically, we obtained data on the amount of monthly VA disability compensation received by the disabled veteran prior to death. We focused on those who recently began collecting DIC benefits due to VA's limited historical data on disability compensation payments to veterans. For these recent recipients, we compared their monthly DIC payments with the amount of VA disability compensation received by the veterans. To determine the extent to which DIC replaces military pay lost due to the death of a servicemember on active duty, we estimated the pay of the servicemember prior to death. VA's data included the servicemember's last military grade, but not his or her last military pay rates. To estimate pay rates, we obtained military pay information from DOD and used the midpoint in the pay ranges for the servicemember's grade in the year he or she died, including the basic pay and housing and subsistence allowances applicable to the servicemember's grade. We compared this estimated pay with the actual amount of DIC benefits received by the servicemember's survivors. For purposes of this analysis, when referring to survivors, we mean one or more persons (family members) surviving a single veteran or servicemember. We assessed the reliability of the VA data we used and judged them to be sufficiently reliable for our purposes. We identified data limitations that did not significantly impact the results of our data analysis, or our findings. For example, 314 of the cases were missing from our data because VA is transitioning from BDN to a new data system. Additionally, we found 31 cases where the recipient's award amounts were incorrect. According to VA officials, this was likely due to data entry errors. We excluded these 345 records--about 1/10 of 1 percent of the entire September 2008 beneficiary file--from our analysis. Our comparisons of DIC with survivor benefits for federal employees focused on three programs: the Civil Service Retirement System (CSRS), the Federal Employees' Retirement System (FERS), and the federal workers' compensation program established by the Federal Employees' Compensation Act (FECA). We chose these programs because they cover the majority of federal employees and, like the DIC program, provide ongoing survivor benefits in the event of the employee's death. Additionally, these programs provide disability benefits to federal employees who suffer an injury or illness, mirroring, to an extent, VA compensation for veterans with disabilities related to their military service. It is difficult to compare DIC benefits to survivor benefits under these programs because DIC generally provides flat payments to survivors regardless of their past incomes, while these federal programs base benefit amounts on prior income levels. Additionally for CSRS and FERS, the employee's length of service and age affect benefits calculations. Therefore, to compare benefits, we constructed several scenarios to examine the DIC benefits available to various veterans and servicemembers, and those available to federal employees with pay and experience equivalent to those veterans and servicemembers. For CSRS and FERS, we developed examples in which the individuals started their careers in time periods in which the federal employees would have been covered by the respective programs. We obtained information on the military pay applicable to a veteran or servicemember in the last year he or she served and assumed that the federal employee would have a high-three average salary equal to this amount. We used these salary amounts to calculate the federal employees' disability benefits to which they were entitled, and used the appropriate cost of living adjustments to determine what their disability benefits would have been in 2009 before dying, and their survivor's benefit after their death in 2009. Similarly, we calculated survivor benefits for servicemembers who died on active duty and for federal employees with comparable years of service and pay at the time of death. To compare FECA benefits with DIC benefits, we constructed several scenarios in which a servicemember died in 2009 and compared these scenarios to a federal employee with an equivalent salary. We assumed that the federal employee died of a job-related injury that was covered by FECA. To provide context for our analysis of DIC benefits, we reviewed previous evaluations of DIC benefits. These included: Past GAO reviews of DIC and other survivor benefits; A program evaluation report prepared for VA in May 2001; and The CNA Corporation's 2007 report prepared for the Veterans' Disability Benefits Commission on VA disability compensation and DIC benefits. To gain an understanding of DIC, its benefit levels, and related issues, we interviewed VA officials, and officials of several veterans and military service organizations. The organizations included the American Legion, the Disabled American Veterans, the Iraq and Afghanistan Veterans of America, The Military Officers Association of America, the National Association for Uniformed Services, the National Military Family Association, the Paralyzed Veterans of America, the Retired Enlisted Association, the Society of Military Widows, the Gold Star Wives of America, Inc., The Military Coalition, and the Tragedy Assistance Program for Survivors. Finally, to provide background on the various disability and survivor benefits identified in this report, we reviewed literature from several agencies' Web sites, including VA, the Department of Defense (DOD), the Social Security Administration (SSA), the Department of Labor, and the Office of Personnel Management. We also reviewed related GAO and Congressional Research Service reports, and relevant federal laws and regulations. Melissa H. Emrey-Arras (Assistant Director), Paul R. Schearf (Analyst-in- Charge), Daniel R. Concepcion, and Gregory D. Whitney made major contributions to this report. In addition, Kirsten B. Lauber and Walter K. Vance assisted in developing the study's methodology; Beverly Ross analyzed VA data; Kyle C. Adams assisted with the calculation of survivor benefits; Susan L. Aschoff and Charles E. Willson provided writing assistance; James E. Bennett helped develop our graphics; and Craig H. Winslow provided legal support. Joseph Applebaum, Timothy J. Carr, Cynthia C. Heckmann, David E. Moser, and Patricia Owens provided additional support and guidance.
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The Dependency and Indemnity Compensation (DIC) program provides monthly payments to the survivors of those who died as a result of a service-connected disability or while on active duty in the military. In fiscal year 2008, the Department of Veterans Affairs (VA) paid over $4.7 billion to about 354,000 survivors, replacing a portion of income lost with the death of the veteran or servicemember. The Veterans' Benefits Improvement Act of 2008 directed the Government Accountability Office (GAO) to study the DIC program and the levels of payments it provides. This report addresses (1) the extent to which DIC replaces VA disability compensation or active duty military pay lost due to the death of a veteran or servicemember, and (2) how DIC benefits compare to benefits for survivors of civilian federal employees. GAO obtained and analyzed data on DIC payments, VA disability compensation, and military pay rates. GAO also obtained information on survivor benefits under federal employee retirement and workers' compensation programs. GAO did not include in its analysis other sources of income survivors may receive, such as Social Security, private pensions, and life insurance. Lastly, GAO interviewed officials from VA and groups representing veterans, servicemembers, and their survivors. For more than half of survivors who recently began collecting DIC, the benefit replaced between 35 and 55 percent of the VA disability compensation or estimated military pay lost due to the death of a veteran or servicemember. Because DIC provides generally flat payments, the rate at which it replaced lost income varied according to the amount of prior income, such as VA disability compensation. The most common survivor was an older female spouse of a totally disabled veteran who, in 2009, received $1,154 per month--the base DIC payment--compared with $2,823 per month paid in VA disability compensation to the disabled veteran prior to death. In these cases, DIC replaced 41 percent of prior compensation. There were, however, DIC recipients at the far ends of the scale. For example, for surviving spouses of mid-ranked officers who died on active duty, the flat rate DIC payment represented 19 percent of prior military pay; for survivors of partially disabled veterans who had received relatively low VA disability compensation, the flat rate DIC payment sometimes represented more than 100 percent of prior compensation. When comparing survivor benefits for DIC with those for comparably paid civilian federal employees, DIC benefits are generally higher than survivor benefits paid by federal retirement programs, but lower than those paid by federal workers' compensation. The DIC program's flat payment structure differs from federal programs in which payment amounts are based on employee salaries and years of employment. We found that for most survivors, DIC provides higher benefits than the federal retirement programs because it gives more money to survivors of lower paid individuals, who comprise the majority of DIC recipients. In contrast, DIC payments are almost always less than workers' compensation payments for survivors of federal employees who die as a result of job-related injuries. For comparable employees, the salary levels of nearly all servicemembers in 2009 would result in higher survivor payments under workers' compensation than under the DIC program.
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Families of OSP scholarship award recipients, as consumers, need complete and timely information about participating schools to make informed decisions about what school is best for the student. Further, federal internal control standards state that organizations must have relevant, reliable, and timely communications, and adequate means of communicating with external parties who may have an impact on the organization achieving its goals. During our 2013 review, we found that OSP provided information to prospective and current OSP families through a variety of outreach activities. However, families lacked key information necessary to make informed decisions about school choice because the directory of participating schools--a key communication tool--was not published in a timely fashion and did not contain key information about tuition, fees, and accreditation. Additionally, scholarships to students were awarded several months after many schools had completed their admissions and enrollment processes, limiting the amount of time and choice in selecting schools. To address these issues, we recommended that Education take steps to ensure that the OSP administrator improve the timing of key aspects of program administration and program information for prospective and participating families. In late October 2015, Education described to us actions that had been taken to address these issues. For example, Education stated that the OSP administrator published its school directory in a timely manner in 2013 and 2014. The SOAR Reauthorization Act, which recently passed in the House and has been introduced in the Senate, includes provisions to address accreditation of participating schools. Effective policies and procedures: During our 2013 review, we found that OSP's policies and procedures lacked detail in several areas related to school compliance and financial accounting, which may weaken overall accountability for program funds. Policies and procedures are a central part of control activities and help ensure necessary actions are taken to address risks to achievement of an organization's objectives. The absence of detailed policies and procedures reflect weak internal control in the areas of risk assessment, control activities, information and communication, and control environment. For example, we found that OSP relied on schools' self-reported information to ensure school compliance and did not have a process for independently verifying information, such as a school's student academic performance, safety, and maintenance of a valid certificate of occupancy. Without a mechanism or procedures to verify the accuracy of the information provided, OSP cannot provide reasonable assurance that participating schools meet the criteria established for participation in the program. As a result, there is a risk that federal dollars will be provided for students to attend schools that do not meet the education and health and safety standards required by the District. Further, at the time of our review, OSP's policies and procedures lacked sufficient detail to ensure each participating school in OSP has the financial systems, controls, policies, and procedures in place to ensure federal funds were used according to federal law. OSP's policies and procedures for the financial stability review of participating schools did not identify the specific risk factors that should be considered when assessing schools' financial sustainability information. As a result, the OSP administrator was unable to confirm that all schools participating in the program were financially sustainable. In addition, OSP lacked detailed policies and procedures for dealing with schools not in compliance with program rules. Furthermore, policies and procedures for fiscal years 2010 through 2012 did not specify how to track administrative expenses, including what should be included, and OSP had little documentation to support administrative expenses incurred during these years. Therefore, while federal law limits the administrative expenses to 3 percent of the annual grant amount, the true cost of administering the OSP program during these years is not known and could be higher or lower than the 3 percent allotted. Without sufficiently detailed policies and procedures for all aspects of a school choice program, the program administrator cannot effectively monitor program operation and may not be able to account for all federal or public dollars spent. To address these issues, we recommended Education require the OSP program administrator to add additional detail to their policies and procedures to more efficiently manage day-to-day program operations. OSP amended its policies and procedures in August 2013 which addressed some of these issues, but OSP did not address all of the weaknesses described and the policies and procedures had not been fully implemented at the time of our review. In addition, in late October 2015, Education described to us actions that they had taken to address these issues. For example, Education stated that its Office of Risk Management Services provided feedback on the OSP administrator's internal policies and procedures. The SOAR Reauthorization Act recently passed by the House and introduced in the Senate includes a provision to address how the program administrator will ensure that it uses internal fiscal and quality controls for OSP. Accurate, Up-to-Date Student Information: According to the internal controls framework, information should be communicated to management and within an organization in a form and time frame that enables officials to carry out their responsibilities and determine whether they are meeting their stated objectives. For example, in OSP--and other eligibility-based choice programs--it is important to have accurate, up-to-date student application information in order to meet program objectives, such as determining eligibility and awarding program scholarships in an efficient and timely manner. However, at the time of our 2013 review OSP's database containing past and current student and school information had several weaknesses, including a lack of documentation and automated checks, and a deficient structure, which left the database open to errors. For example, there were many records with missing fields and data that were partially entered, and the database did not have automated data checks, which would reduce the risk that significant errors could occur and remain undetected and uncorrected. We found these deficiencies also negatively affected day-to-day program management, and impeded efforts to communicate information about the program to families and Education. In addition, the database's current structure hampers OSP's ability to look at historical trends and use them as an effective management tool. We also found incomplete records from past years which will continue to be a problem for future program administrators who need them for effective program implementation and oversight. In addition, because a key variable in the OSP database used in the student selection process was unreliably populated, OSP's ability to accurately select students based on established priorities for the program may have been compromised. To address issues with the database, we recommended Education have the program administrator improve the program database to provide reasonable assurance that there is sufficiently reliable data regarding the operation of OSP. In late October 2015, Education stated that OSP did not have the capacity or financial resources to update the database and Education could not require them to make the suggested updates. As noted above, the SOAR Reauthorization Act recently passed by the House and introduced in the Senate includes a provision intended to ensure the entity uses internal fiscal and quality controls for OSP. Timely Financial Reporting: Reliable published financial statements, such as those required by the Single Audit Act, are needed to meet program requirements and to ensure federal funds are being used appropriately. The Single Audit Act requires that recipients submit their Single Audit reports to the federal government no later than 9 months after the end of the period being audited. However, the required audit documents for the year ended Sept. 30, 2010 were issued by the program administrator on Jan. 31, 2013--more than 2 years after the end of its 2010 fiscal year. As a result, until these reports were issued Education did not have the financial reports required to properly account for the federal funds expended for OSP. To address these issues we recommended Education explore ways to improve monitoring and oversight of the program administrator. In 2014, Education stated that OSP was current with all required financial audits and provided documentation that, OSP's 2014 Grant Award Notification imposed a special condition due to OSP's history of untimely financial reporting. Specifically, the award notification stated that Education could impose sanctions, such as withholding a percentage of or entirely suspending federal awards, if OSP fails to submit a timely financial audit or written explanation. Internal control activities help ensure that actions are taken to address risks, and include a wide range of activities such as approvals, authorizations, and verifications. According to the MOU between Education and the District, the District is responsible for conducting regulatory inspections of participating schools and providing the administrator with the results of those inspections. However, we found that requirements under the MOU were not being met. For example, inspections of participating private schools were often not conducted. For our 2013 report, OSP told us they did not receive any information from the District as a result of any inspections, nor did the administrator follow up with District agencies to inquire about them. Given that the program administrator is responsible for ensuring that participating schools continue to be eligible to receive federal dollars through OSP, notifying the District agencies about inspections is important in ensuring appropriate oversight of participating schools. The MOU includes a responsibility for the program administrator to notify District agencies to conduct these inspections, but because the program administrator is not a signatory to the MOU, OSP officials were not fully aware of this responsibility, they said. As a result, activities crucial to the successful implementation of the program--such as building, zoning, health, and safety inspections--may not be occurring for all participating schools. To address these issues, we recommended Education work with the Mayor of the District of Columbia to revise the MOU that governs OSP implementation to include processes that ensure the results of OSP school inspections are communicated to the program administrator. In late October 2015, Education described to us actions that they had taken to address these issues. For example, Education stated that it ensured that the OSP administrator informed the appropriate District agency of the names of the participating schools for the purpose of conducting required inspections. The SOAR Reauthorization Act recently passed by the House and introduced in the Senate includes provisions that require Education and the District to revise their MOU to, among other things, address some of these issues. In conclusion, OSP has provided low-income families in the District additional choices for educating their children and has likely made private school accessible to some of these children who would not otherwise have had access. However, to help ensure that OSP efficiently and effectively uses federal funds for their intended purpose--that is, to provide increased opportunities to low-income parents to send their children, particularly those attending low-performing schools, to private schools--any entity responsible for operating a school choice program such as OSP needs a strong accountability infrastructure that incorporates the elements of internal control discussed above. Well- designed and executed operational and financial management policies and procedures and the underlying systems help provide reasonable assurance that federal funds are being used for the purposes intended and that funds are safeguarded against loss from error, abuse, and fraud. Education stated that they had addressed some of the issues that we identified, but we were unable to assess the extent to which they had implemented our recommendations in time for this statement. We continue to believe that by fully addressing our nine remaining recommendations for the OSP program, Education would promote more efficient and effective program implementation and accountability over federal funds, regardless of which entity is administering the program. Mr. Chairman Johnson, Ranking Member Carper, and Members of the Committee, this concludes my statement for the record. If you or your staff have any questions about this statement, please contact Jacqueline M. Nowicki at (617) 788-0580. You may also reach me by email at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this statement include Nagla'a El-Hodiri (Assistant Director), Jamila Jones Kennedy, and Michelle Loutoo Wilson. In addition, key support was provided by Susan Aschoff, William Colvin, Julianne Cutts, Alexander Galuten, Gretta L. Goodwin, Sheila McCoy, Kimberly McGatlin, Jean McSween, John Mingus, Linda Siegel, Deborah Signer, and Jill Yost. Other contributors to the report on which the statement is based are Hiwotte Amare, Carl Barden, Maria C. Belaval, Edward Bodine, Melinda Cordero, David Chrisinger, Carla Craddock, Kristy Kennedy, John Lopez, Mimi Nguyen, James Rebbe, Ramon Rodriguez, George A. Scott, Aron Szapiro, and Helina Wong. 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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School vouchers are one of many school choice programs. Vouchers provide students with public funds to attend private schools and are often featured in discussions on education reform. The District of Columbia's (District) Opportunity Scholarship Program (OSP) has garnered national attention as the first federally-funded private school voucher program in the United States. Since the program's inception, Congress has provided more than $180 million for OSP, which has, in turn, provided expanded school choice to low-income students by awarding more than 6,100 scholarships to low-income students in the District. GAO's 2013 report was in response to a request from the Chairman of the Subcommittee on Financial Services and General Government, Committee on Appropriations, U.S. Senate that GAO review the extent to which OSP was meeting its stated goals and properly managing federal funds. This statement is based on GAO's 2013 report, and discusses the importance of ensuring effective implementation of OSP and any future similar federal school choice programs and providing sufficient accountability for public funds. Students in the District of Columbia (District) have many choices for K-12 schooling including charter, magnet, and traditional public schools, as well as private schools through the federally funded Opportunity Scholarship Program (OSP). Strong fiscal monitoring and oversight of the various schools that participate in choice programs is critical to ensuring that these programs have effective internal controls that help them meet the goal of providing a quality education to students. Internal control is broadly defined as a process designed to provide reasonable assurance that an organization can achieve its objectives. Five internal control standards--control environment, risk assessment, control activities, information and communication, and monitoring--should be an integral part of a system that managers use to regulate and guide an agency's operations. During GAO's 2013 review of OSP, most families GAO spoke with were generally happy with their children's participation in the program, citing increased safety and security at their children's OSP schools and improved quality of education. However, GAO found weaknesses in three areas--access to timely and complete program and award information, effective controls to safeguard federal funds, and clearly defined and properly executed roles and responsibilities--that are the result of internal control deficiencies that may limit the effectiveness of OSP and its ability to meet its goal of providing a quality education experience for students in the District. Strong internal controls in these areas would strengthen the OSP and are critical to the success of any similar federally funded school voucher program. In 2013, GAO made 10 recommendations to Education to improve OSP. To date, one recommendation has been closed as implemented. In October 2015, Education told GAO that it had addressed some of the issues that GAO identified in the 2013 report, but GAO was unable to assess the extent to which they had implemented our recommendations in time for this statement. GAO continues to believe that the 2013 recommendations would address weaknesses previously identified in OSP, and would improve the implementation and effectiveness of OSP--and any future federally funded choice programs.
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The Air Force is developing the F/A-22 aircraft to replace its fleet of F-15 air superiority aircraft. The F/A-22 is designed to be superior to the F-15 by being capable of flying at higher speeds for longer distances, less detectable, and able to provide the pilot with substantially improved awareness of the surrounding situation. The National Defense Authorization Act for Fiscal Year 1998 requires us to annually assess the F/A-22 development program and determine whether the program is meeting key performance, schedule, and cost goals. We have issued six of these annual reports to Congress. We have also reported on F/A-22 production program costs over the last 3 years. Most recently, we reported on F/A-22 production and development in February and March 2003, respectively. Following a history of increasing cost estimates to complete the development phase of the F/A-22 program, the National Defense Authorization Act for Fiscal Year 1998 established a cost limitation for both the development and production programs. Subsequently, the National Defense Authorization Act for Fiscal Year 2002 eliminated the cost limitation for the development program but left the cost limit for production in place. The production program is now limited to $36.8 billion. The current cost estimate of the development program is $21.9 billion. In the past several years, we have reported on a range of performance issues that have arisen during the development of the F/A-22. F/A-22 estimated performance in the areas of supercruise, acceleration, maneuverability, radar observability, combat radius, and radar range in searching targets have so far been met or exceeded. However, problems have surfaced related to some overheating concerns during high-speed flight-testing, reliability, avionics that perform radar, communication, navigation, identification and electronic warfare functions as well as excess movement of the vertical tails. Modifications are being made to some test aircraft to address some of these problems. For now, however, testing in some areas is restricted. In 2001, we reported on continuing increases in aircraft weight and that more frequent maintenance than planned on the aircraft was being required. We also reported on structural inadequacies in the aft (rear) fuselage and on problems with the separation of some materials within the horizontal tail section and cracking of the clear section of the canopy. In 2002, we again reported that the F/A-22's performance could be affected by increased aircraft weight and maintenance needs as well as a potential problem with "buffeting", or excessive movement, of the aircraft's vertical tails. We also continued to report on problems with the separation of materials within the horizontal tail section and cracking of the clear section of the canopy. We reported last month that the F/A-22 developmental program did not meet key performance goals established for fiscal year 2002 and continues to confront numerous technical challenges, specifically: Avionics instability: Software instability has hampered efforts to integrate advanced avionics capabilities into the F/A-22 system. Avionics control and integrated airborne electronics and sensors are designed to provide an increased awareness of the situation around the pilot. The Air Force told us avionics have failed or shut down during numerous tests of F/A-22 aircraft due to software problems. The shutdowns have occurred when the pilot attempts to use the radar, communication, navigation, identification, and electronic warfare systems concurrently. Although the plane can still be flown after the avionics have failed, the pilot is unable to successfully demonstrate the performance of the avionics. Therefore, the Air Force has had to extend the test program schedule. The Air Force has recognized that the avionics problems pose a high technical risk to the F/A-22 program, and in June 2002 the Air Force convened a special team to address the problem. According to the team, the unpredictable nature of the shutdowns was not surprising considering the complexity of the avionics system. The team recommended that the software be stabilized in the laboratory before releasing it to flight-testing. The team further recommended conducting a stress test on the software system architecture to reduce problems and ensure it is operating properly. The Air Force implemented these recommendations. Further, the Air Force extended the avionics schedule to accommodate avionics stability testing and it now plans to complete avionics testing in the first quarter of 2005. However, Air Force officials stated they do not yet understand the problems associated with the instability of the avionics software well enough to predict when they will be able to resolve this problem. Vertical fin buffeting: Under some circumstances, the F/A-22 experiences violent movement, or buffeting, of the vertical fins in the tail section of the aircraft. Buffeting occurs as air, moving first over the body and the wings of the aircraft, places unequal pressures on the vertical fins and rudders. The buffeting problem has restricted the testing of aerial maneuvers of the aircraft. In addition, unless the violent movement is resolved or the fins strengthened, the fins will break over time because the pressures experienced exceed the strength limits of the fins. This could have an impact on the expected structural life of the aircraft. Lockheed Martin has developed several modifications to strengthen the vertical fins. Overheating concerns: Overheating in the rear portions of the aircraft has significantly restricted the duration of high-speed flight-testing. As the F/A- 22 flies, heat builds up inside several areas in the rear of the aircraft. Continued exposure to high temperatures would weaken these areas. For example, a portion of the airframe that sits between the engines' exhausts experiences the highest temperatures. This intense heat could weaken or damage the airframe. To prevent this heat buildup during flight-testing, the aircraft is restricted to flying just over 500 miles per hour, about the same speed as a modern jet liner, and significantly below the supercruise requirement. Currently, the F/A-22 flies with temperature sensors in those areas of the aircraft and slows down whenever the temperature approaches a certain level. The Air Force may incorporate a modification that adds copper sheets to the rear of the aircraft to alleviate the problem. The Air Force began these modifications in January 2003 and plans to complete them by July 2003. Horizontal tail material separations: F/A-22 aircraft have experienced separations of materials in the horizontal tail and the shaft, which allow the tail to pivot. Because the separations reduce tail strength, the Air Force restricted flight-testing of some aircraft until it had determined that this problem would not affect flight safety during testing. The Air Force and the contractor initially believed that improvements to the aircraft's manufacturing process would solve this problem. However, the Air Force has determined that it could only solve this problem by redesigning the aircraft's tail. The Air Force plans to conduct flight-testing of the redesigned tail between February 2004 and April 2004. Airlift support requirements: The Air Force estimates it will not meet the F/A-22 airlift support requirement--a key performance parameter. The airlift support requirement is that 8 C-141 aircraft or their equivalents would be sufficient to deploy a squadron of 24 F/A-22s for 30 days without resupply. Today, the Air Force estimates that 8.8 C-141 equivalents will be necessary. Impact of maintenance needs on performance: The F/A-22's performance may also be affected by maintenance needs that exceed established objectives. The Air Force estimates that the F/A-22 should, at this point in its development, be able to complete 1.67 flying hours between maintenance actions and 1.95 flying hours by the end of development. However, aircraft are requiring five times the maintenance actions expected at this point in development. As of November 2002, the development test aircraft have been completing only .29 flying hours between maintenance actions. Therefore, the development test aircraft are spending more time than planned on the ground undergoing maintenance. Testing is instrumental to gauging the progress being made when an idea or a concept is translated into an actual product that people use. DOD divides testing into two categories: developmental and operational. The goal of developmental tests is to determine whether the weapon system meets the technical specifications of the contract. The goal of operational testing is to evaluate the effectiveness and suitability of the weapon system in realistic combat conditions. Operational testing is managed by different military test organizations that represent the customers, such as the combat units that will use the weapons. The results of operational tests are provided to Congress as well as the Secretary of Defense and senior service officials. Our reviews over the years have underscored the importance of not delaying tests too late in development--when it is more difficult, costly, and time consuming to fix any problems discovered. Yet, we have been reporting on delays of flight tests for the F/A-22 and that these delays have contributed to scheduling and cost problems affecting the program. F/A-22 flight-testing began in late 1997. Each year since 1998, we have reported that assembly of the test aircraft was requiring more time than planned and that this was causing the test aircraft to be delivered late to the test center for flight-testing. We have also reported annually since 2000 that the flight-test program efficiency--the amount of flight-testing accomplished--has been less than planned. In March 2003, we reported that F/A-22 flight-testing was slower than expected in 2002 in all test areas according to Office of the Secretary of Defense (OSD) testing officials. Consequently, the Air Force extended flight test schedules and reduced the number of flight tests. Many tasks originally planned for 2002 were rescheduled for 2003. Further, the Air Force now plans to conduct more developmental flight-testing concurrently with operational testing. Continuing technical problems were the primary reasons for the most recent delay in flight-testing. In addition, late delivery of development aircraft to the flight-test center continued to be a contributing problem. Late deliveries were due not only to technical problems but also to ongoing problems associated with the manufacture and assembly of development aircraft by the prime contractor. With the new schedule, the Air Force delayed the beginning of operational testing for 4 months, until the portion of developmental testing required to begin operational testing could be completed. Operational testing is now planned to begin in August 2003. Table 1 shows the changes in key F/A-22 schedule events. Further, according to OSD officials involved in operational testing, there is a high risk of not completing an adequate amount of development flight- testing before operational testing is scheduled to begin. Indeed, we believe that it is unlikely that the Air Force will be able to complete all necessary avionics flight-testing prior to the planned start of operational testing. Based on F/A-22 flight test accomplishment data and current flight test plans, we project that the start of operational testing might be delayed until January 2004. As a result, operational testing could be delayed by several months beyond the current planned date of August 2003. Cost increases have plagued the F/A-22 program since it began in 1991. They have spurred Congress to impose spending limits and have forced the Air Force to scale back production. Nevertheless, the Air Force is still contending with cost increases in three principal areas: development, production, and modernization. Since 1997, the Air Force's estimated cost to develop the F/A-22 has increased by $3.2 billion. Figure 1 highlights development cost limitation and estimate increases during the past 6 years. Increases prior to 1998 have prompted limitations on spending from Congress. While the Air Force held the position that these limitations could be met until recently, our reviews showed that there was a potential for additional increases because of delays. Table 2 presents a time line of congressional limitations, our findings and DOD's positions. The initial congressional limitation of $18.688 billion established in 1997 followed an Air Force team's review of estimated development and production costs. That team concluded in 1997 that additional time would be required to complete the development program and estimated that costs would increase from $17.4 billion to $18.688 billion. The team recommended several changes to the development program's schedule, including slower manufacturing than planned for a more efficient transition from development to low-rate initial production and an additional 12 months to complete avionics development. The National Defense Authorization Act for Fiscal Year 1998 then established this $18.688 billion amount as a cost limitation for the development program. Congressional direction in fiscal year 2000 legislation shifted six production representative test aircraft to the development program and caused the cost limitation to be adjusted upward to $20.4 billion. In September 2001, DOD acknowledged that the cost to complete the development program would exceed the cost limitation by $557 million. This increase brought the development cost estimate to $21 billion. Subsequently, in December 2001, the National Defense Authorization Act for fiscal year 2002 eliminated the development cost limitation. In March 2003, we reported that the Air Force estimated that development costs had increased by $876 million, bringing total development cost to $21.9 billion. This increase was due to the technical problems and schedule delays related to avionics and vertical fin buffeting discussed earlier. Over the last 6 years, DOD has identified about $18 billion in estimated production cost growth during the course of two DOD program reviews. As a result, the estimated cost of the production program currently exceeds the congressional cost limit. The Air Force has implemented cost reduction plans designed to offset a significant amount of this estimated cost growth. But the effectiveness of these cost reduction plans has varied. During a 1997 review, the Air Force estimated cost growth of $13.1 billion. The major contributing factors to this cost growth were inflation, increased estimates of labor costs and materials associated with the airframe and engine, and engineering changes to the airframe and engine. These factors made up about 75 percent of the cost growth identified in 1997. In August 2001, DOD estimated an additional $5.4 billion in cost growth for the production of the F/A-22, bringing total estimated production cost to $43 billion. The major contributing factors to this cost growth were again due to increased labor costs and airframe and engine costs. These factors totaled almost 70 percent of the cost growth. According to program officials, major contractors' and suppliers' inability to achieve the expected reductions in labor costs throughout the building of the development and early production aircraft has been the primary reason for estimating this additional cost growth. The Air Force was able to implement cost reduction plans and offset cost growth by nearly $2 billion in the first four production contracts awarded. As shown in table 2, the total offsets for these contracts slightly exceeded earlier projections by about $.5 million. Cost reduction plans exist but have not yet been implemented for subsequent production lots planned for fiscal years 2003 through 2010 because contracts for these production lots have not yet been awarded. If implemented successfully, the Air Force expects these cost reduction plans to achieve billions of dollars in offsets to estimated cost growth and to allow the production program to be completed within the current production cost estimate of $43 billion. However, this amount exceeds the production cost limit of $36.8 billion. In addition, while the Air Force has been attempting to offset costs through production improvement programs (PIP), recent funding cutbacks for PIPs may reduce their effectiveness. PIPs focus specifically on improving production processes to realize savings by using an initial government investment. The earlier the Air Force implements PIPs, the greater the impact on the cost of production. Examples of PIPs previously implemented by the Air Force include manufacturing process improvements for avionics, improvements in fabrication and assembly processes for the airframe, and redesign of several components to enable lower production costs. As shown in figure 2, the Air Force reduced the funding available for investment in PIPs by $61 million for lot 1 and $26 million for lot 2 to cover cost growth in production lots 1 and 2. As a result, it is unlikely that PIPs covering these two lots will be able to offset cost growth as planned. Figure 3 shows the remaining planned investment in PIPs through fiscal year 2006 and the $3.7 billion in estimated cost growth that can potentially be offset through fiscal year 2010 if the Air Force invests as planned in these PIPs. In the past, Congress has been concerned about the Air Force's practice of requesting fiscal year funding for these PIPs but then using part of that funding for F/A-22 airframe cost increases. Recently, Congress directed the Air Force to submit a request if it plans to use PIP funds for an alternate purpose. Modernization costs have increased dramatically in recent years. In fiscal year 2001, the Air Force plan was to spend a total of $166 million for upgrades to enhance the operational capabilities of the F/A-22. Currently, Air Force plans in 2004 call for spending almost $3 billion through fiscal year 2009 for modernization projects. (See fig. 4). Most of the recent increase in modernization funding is necessary to provide increased ground attack capability. Other modernization projects include upgrading avionics software, adding an improved short-range missile capability, upgrading instrumentation for testing, and incorporating a classified project. The cost increases experienced by the F/A-22 program have, in part, forced the Air Force to reduce its planned procurement over time by more than half (see fig. 5). Such a decrease, in turn, has jeopardized the Air Force's ability to modernize its fleet of tactical aircraft. In late 2001, in the face of a significant cost overrun in the estimated cost to produce the F/A-22, the total aircraft to be produced was reduced. At the same time, DOD requested that Congress remove the production cost limit. While the congressional limit on production costs remains in effect, DOD transferred production funding to help offset $876 million in development cost growth. The net effect was another decrease in total aircraft to be produced--now estimated at 276. This reduction may have a negative effect on Air Force plans to modernize its tactical aircraft fleet. The F/A-22 is designed to be a replacement for the F-15 aircraft, but the F/A-22 quantity reductions that have occurred since 1991 tend to exacerbate the increasing trend in the average age of current Air Force fighter aircraft. In 2001, we reported that the average age of Air Force tactical fighters would continue to increase until the fleet reached an average age of 21 years in 2011. This is almost twice the average age goal of the Air Force. Aging equipment contributes significantly to increased operating and support costs. Despite continuing development problems and challenges, the Air Force plans to continue acquiring production aircraft at increasing annual rates. For example, the Air Force plans to acquire 20 aircraft during 2003, rather than the maximum of 16 Congress allowed without DOD's submittal of a risk assessment and certification. Since 2001, we have reported that this is a very risky strategy because the Air Force runs the chance of higher production costs by acquiring significant quantities of aircraft before adequate testing is complete. Late testing could identify problems requiring costly modifications to achieve satisfactory performance. As shown in figure 6, the Air Force is committed to acquiring 73 production aircraft (26 percent) before operational and development testing is complete. We believe that this is an overly optimistic strategy given the remaining F/A-22 technical problems and the current status of testing. As we have noted, acquiring aircraft before completing adequate testing to resolve significant technical problems increases the risk of costly modifications later. If F/A-22 testing schedules slip further--as we believe is likely--even more aircraft will be acquired before development and operational testing is complete, and the risk of costly modifications will increase still more. The F/A-22 has the potential for being the most advanced air superiority aircraft ever to join the Air Force's inventory--using several advanced technologies and capabilities. But performance problems, schedule delays, and cost overruns threaten the program's success as well as DOD's ability to modernize its tactical aircraft fleet. Moreover, uncertainties about some of the performance capabilities have increased the risk that the Air Force will have to modify a larger quantity of aircraft after they are built. For these reasons, our recommendations have stressed the need for the Air Force to (1) avail itself of all opportunities for gaining manufacturing efficiencies during production, (2) find ways to fund cost reduction plans that require initial government investment instead of using funding to cover cost growth in earlier aircraft lots, and (3) reconsider its decision to increase the annual production rate beyond 16 until greater knowledge on any need for modifications is established through operational testing. Moreover, we have also recommended, in light of the high risk nature of the program, that Congress be informed about the amount of cost reduction plans identified to offset cost growth, the potential cost of production if cost reduction plans are not as effective as planned, or the quantity of aircraft that can be produced within the cost limit. Congress would be able to use this information to help exercise proper program oversight.
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The Air Force is developing the F/A-22 aircraft to replace its fleet of F-15 air superiority aircraft. The F/A-22 is designed to be superior to the F-15 by being capable of flying at higher speeds for longer distances, less detectable, and able to provide the pilot with substantially improved awareness of the surrounding situation. The National Defense Authorization Act for Fiscal Year 1998 requires us to annually assess the F/A-22 development program and determine whether the program is meeting key performance, schedule, and cost goals. We have issued six of these annual reports to Congress. We have also reported on F/A-22 production program costs over the last 3 years. Most recently, we reported on F/A-22 production and development in February and March 2003 respectively. This testimony summarizes our work on the F/A-22 program, covering performance, cost, and scheduling issues. In the past several years, we have reported on a range of problems affecting the development of F/A-22. Specifically, F/A-22 estimated performance in the areas of supercruise, acceleration, maneuverability, radar observability, combat radius, and range in searching targets have so far been met or exceeded. However, problems have surfaced related to overheating during high-speed flight-testing, reliability, avionics that perform radar, communication, navigation, identification and electronic warfare functions as well as excess movement of the vertical tails. Modifications are being made to some test aircraft to address some of these problems. For now, however, testing in some areas is restricted. Each year since 1998, we have reported that assembly of the test aircraft was requiring more time than planned and that this was causing the test aircraft to be delivered late to the test center for flight-testing. We have also reported annually since 2000 that flight-test program efficiency--the amount of flight-testing accomplished--has been less than planned. Cost increases have plagued the F/A-22 program since development began in 1991. Since 1997, the Air Force's estimated cost to develop the F/A-22 has increased by $3.2 billion bringing the total estimate to $21.9 billion. In addition, over the last 6 years, DOD has identified about $18 billion in estimated production cost growth bringing the total estimate to $42.2 billion--which exceeds the congressionally mandated production cost limit of $36.8 billion. Further, modernization costs have increased dramatically in recent years. Actions to offset estimated cost growth have had mixed success. These problems have dramatically affected the F/A-22 program. Cost increases, in part, have forced the Air Force to substantially decrease the number of aircraft to be purchased--from 648 to 276. Delays in testing also have significant consequences. Continuing to acquire aircraft before adequate testing is a high-risk strategy that could serve to further increase production costs. Moreover, F/A-22 problems have limited DOD's ability to upgrade its aging tactical aircraft fleet. If the F/A-22 program had met its original goals, the Air Force could have been replacing older aircraft with F/A-22 aircraft over 7 years ago. Now, however, it will not begin replacing aircraft until late 2005 at the earliest. The rate of replenishment will be substantially lower, due to the decrease in the number of new aircraft to be purchased. As a result, DOD will have to continue to use tactical aircraft that contribute to increased operating and support costs and it will have to wait longer than anticipated to have access to the advanced capabilities to be offered by the F/A-22.
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As you know, Mr. Chairman, the decennial census is a constitutionally mandated enterprise critical to our nation. Census data are used to apportion seats and redraw congressional districts, and to help allocate hundreds of billions of dollars in federal aid to state and local governments each year. In developing the 2010 Census, a long-standing challenge for the Bureau has been the reliability of its IT systems. For example, in March 2009, we reported that the Bureau needed to develop a master list of interfaces between systems; set priorities for the testing of interfaces based on criticality; and develop testing plans and schedules. In the months that followed, while the Bureau strengthened its management and oversight of its IT systems, additional work was needed under very tight time frames. More generally, now that the census has moved to the operational phase, it will be important for the Bureau to stay on schedule. The enumeration has several immutable deadlines, and an elaborate chain of interrelated pre- and post-Census Day activities are predicated upon those dates. Specifically, the Department of Commerce--the Bureau's parent agency-- is legally required to (1) conduct the census on April 1 of the decennial year, (2) report the state population counts to the President for purposes of congressional apportionment by December 31 of the decennial year, and (3) send population tabulations to the states for purposes of redistricting no later than 1 year after the April 1 census date. To meet these reporting requirements, census activities need to take place at specific times and in the proper sequence. A time line of key census operations is shown in figure 1. Because of these tight deadlines, as the enumeration progresses, the tolerance for any operational delays or changes becomes increasingly small. Consequently, as the enumeration progresses, it will be important for the Bureau to closely monitor key performance metrics to ensure that the various operations are on track and quickly address any glitches. Indeed, the interrelated nature of census activities raises the risk that a shortcoming in one operation could trigger other activities to spiral downward. For example, a lower than expected mail response rate would drive up the follow-up workload, which in turn would increase staffing needs and costs. Of course the reverse is also true, where a success in one operation could have a number of positive downstream impacts. Although the Bureau has made progress in testing and deploying IT systems for the 2010 Census, significant performance issues have been identified with both the workflow management system--PBOCS--as well as with the Decennial Applicant Personnel and Payroll System (DAPPS), the automated system the Bureau is using to handle the payroll of the more than 1 million temporary employees that are to work on the census. In March 2009, we reported that the Bureau had a number of problems related to testing of key IT systems, including weaknesses in test plans and schedules, and a lack of executive-level oversight and guidance. In that report, we recommended that the Bureau complete key system testing activities and improve testing oversight and guidance. The Bureau agreed with our recommendations. Since that time, we have been monitoring and tracking the Bureau's progress and, last October, we testified that the Bureau had taken steps to improve its management and testing of key IT system for the 2010 Census, such as naming a Decennial Census Testing Officer whose primary responsibilities include monitoring testing for decennial census activities. The Bureau had also completed limited end- to-end testing of PBOCS. The Bureau developed this workflow management system--which is designed to manage the work assignments and related maps for hundreds of thousands of enumerators--late in the decade when it moved from handheld computers, which it found unreliable, to a paper-based approach for some field operations. These operations include NRFU, when enumerators collect data through personal interviews from the tens of millions of households that fail to mail back a census questionnaire. However, critical performance issues still need to be addressed and additional testing remains to be completed. For example, in December 2009, the Bureau completed two iterations of a key performance test, known as the Decennial Application Load Test. For the test, more than 8,000 field staff at about 400 local census offices performed a combination of manual and automated tests to assess the performance of key IT systems, including DAPPS and the first release of PBOCS. In the first test, DAPPS failed, and other key systems, including PBOCS, performed slowly. There were system communication errors as well. Bureau officials stated that many of these issues were resolved during the second iteration of testing; however, others remain to be resolved and new issues were identified. For example, DAPPS performed slowly during the second iteration of testing. This issue must be resolved and retested. To the Bureau's credit, the performance test helped to identify significant issues before systems are needed for key field operations. DAPPS program officials stated that the current version of the program has been deployed since October 2008 and has been processing payroll for a smaller number of temporary census employees (about 140,000). However, three major issues, involving system hardware, software, and the operating system, were identified as the likely causes of DAPPS system failure during the first load test. At least one of these issues was known to exist before the load test, but has not yet been resolved. The officials stated that they are taking several steps to resolve these issues, including upgrading and reconfiguring the system, and deploying additional hardware to support the system. An additional load test is also planned for DAPPS. The officials stated that they plan to have all issues resolved by the end of February, and acknowledge that it is critical that DAPPS be fully functional under a heavy load by mid-March, when the Bureau will begin hiring a large number of temporary employees (about 600,000) for NRFU who will need to be paid using the system. In addition to issues mentioned with DAPPS, the December load test was not intended to be a comprehensive test of PBOCS, which has multiple releases at varying stages of development and testing. The first release of this system was deployed for early census field operations in January 2010, but it has known defects, such as limited functionality, slow performance, and problems generating certain progress and performance reports. In addition, the development and testing of two other releases is needed before the system is ready for other key field operations, such as the enumeration of residents in group quarters, scheduled to begin in March 2010. In recognition of the serious implications that a failed PBOCS would have for conducting of the 2010 Census, the Bureau has taken additional steps to mitigate the outstanding risks. For example, in June 2009, the Bureau chartered an independent assessment team, chaired by the Bureau's Chief Information Officer, to monitor and report on, among other things, the system's development and testing progress. These efforts are encouraging. However, the aggressive development and testing schedule presents various challenges. For example, two of the three releases of PBOCS were not included in the recent performance test because development of these releases had not yet been completed. This increases the risk that performance issues, such as those described above, may reoccur in future releases of the system and the Bureau's ability to resolve and retest these issues before the system is needed for key field operations will be limited. In addition to DAPPS and PBOCS, the Bureau will rely on six other key automated systems to conduct the census. Progress has been made with respect to system testing. However, much system testing remains to be completed in the next few months, as shown in the following table. Given the importance of IT systems to the decennial census, it is critical that the Bureau ensure that DAPPS, PBOCS, and other key systems are thoroughly tested. The limited amount of time to resolve what are, in certain cases, significant performance issues creates a substantial challenge for the Bureau. In 2008, we reported that the Bureau had not carried out the necessary analyses to demonstrate that the then life-cycle cost estimate of about $11.5 billion for the 2010 Census was credible, and we recommended that the Bureau better document and update the estimate, to which it generally agreed. Since then, two early census field operations have experienced major differences between their estimated and actual costs. For address canvassing, where census workers verify address lists and maps, actual costs exceeded the Bureau's initial estimate of $356 million by $89 million, or 25 percent. In contrast, for group quarters validation, where census workers verify addresses of group housing, actual costs were below the Bureau's estimate of $71 million by about $29 million, or 41 percent. Because of cost overruns during address canvassing, as well as concerns over the increased number of vacant units due to foreclosures, the Bureau has implemented our recommendation and reexamined the assumptions and other data used to support the cost estimate for NRFU, the most costly and labor-intensive of all census field operations. Earlier this month, the Bureau provided us with the results from that reexamination. Although we have not fully assessed the Bureau's analysis, our preliminary review shows that the Bureau now estimates that NRFU will cost about $2.3 billion, a decrease of around $400 million (15 percent) from its previous estimate of about $2.7 billion. In updating the estimate, the Bureau considered a number of cost drivers. For example, the Bureau reviewed 1) field work assumptions--such as miles driven per case, pay rates, hours worked per week, and attrition--which the Bureau updated based on actual Census 2000 data, national and field tests, and address canvassing results; 2) factors affecting response rate and hence NRFU workload--such as the national trend in survey response, use of a bilingual questionnaire and replacement mailing for 2010, and the vacancy rate; and 3) enumerator productivity rates, based on regional managers' concerns over enumerating vacant units and non-English-speaking households. Further, in its analysis, the Bureau cited holding pay rates for NRFU temporary staff at 2009 levels, rather than the proposed 2010 pay rate, as one of the reasons for the reduction in NRFU costs. According to the Bureau, two cost drivers--workload, based on the mail response rate, and productivity--are uncertain and could have a significant effect on the ultimate cost of NRFU. For example, the Bureau states that if the response rate decreases by 2 percentage points due to extreme circumstances, such as an immigration backlash, costs could increase by $170 million. Likewise, if PBOCS continues to experience performance problems causing 2 weeks of lost productivity, the Bureau says it would need to hire and train more staff to complete NRFU in order to deliver the apportionment counts to the President by December 31, 2010, which, according to the Bureau, could increase costs by about $138 million. As we previously recommended, revising cost estimates with updated data is an important best practice for cost estimation. However, the Bureau's analyses of cost are not complete. While the Bureau has finalized its reexamination of NRFU cost, it continues to update the costs for other NRFU-related operations. These operations include the NRFU Reinterview, a quality assurance procedure designed to ensure that field procedures were followed and to identify census workers who intentionally or unintentionally produced data errors. It also includes the Vacancy/Delete Check operation, which is a follow-up to NRFU and is designed to verify the status of addresses classified as vacant, or addresses determined to be nonexistent (deletes) during NRFU, as well as cases added since the NRFU workload was initially identified. According to the Bureau, emerging information about the Vacancy/Delete Check operation suggest that the workload may be much higher than originally expected and could increase costs from $345 million to $482 million--almost $137 million, or 40 percent. The Bureau said it will update the cost estimates of both these operations once additional information becomes available. A reliable cost estimate is critical to the success of any program because it provides the basis for informed investment decision making, realistic budget formulation, meaningful progress measurement, proactive course correction when warranted, and accountability for results. In contrast to the IT systems, the rollout of other activities is going more smoothly. Indeed, the Bureau has taken steps to address certain previously identified problems, and its plans to improve the count of hard-to- enumerate groups are generally more robust compared to similar activities during the 2000 Census. Those activities include procedures for fingerprinting temporary employees; the Bureau's efforts to count people residing in nursing homes, dormitories, and other group living arrangements known as "group quarters"; the rollout of key marketing efforts aimed at improving the participation of hard-to-count populations; the Bureau's plans for a mailing a second, follow-up questionnaire and the removal of late mail returns; and the Bureau's plans to secure a complete count in the hurricane-affected areas along the Gulf Coast. The Bureau plans to fingerprint its temporary workforce for the first time in the 2010 Census to better conduct background security checks on its workforce of hundreds of thousands of temporary census workers. However, the Bureau found that during address canvassing, an operation that the Bureau conducted in the summer of 2009 to verify every address in the country, 22 percent of the workers (approximately 35,700 people) hired for the operation had unclassifiable prints. The Federal Bureau of Investigation (FBI) determined that the issue was generally the result of errors that occurred when the prints were first taken at the local census offices. To fingerprint workers during address canvassing, Bureau employees captured two sets of fingerprints on ink fingerprint cards from each temporary worker by the end of the workers' first day of training. The cards were then sent to the Bureau's National Processing Center in Jeffersonville, Indiana, to be scanned and electronically submitted to the FBI. If the first set of prints were unclassifiable, then the National Processing Center sent the FBI the second set of prints. If the results showed a criminal record that made an employee unsuitable for employment, the Bureau either terminated the person immediately or placed the individual in a nonworking status until the matter was resolved. To help ensure the success of fingerprinting operations for NRFU--which will peak at approximately 484,000 fingerprint submissions over a 3-day period from April 28-30, 2010--the Bureau will follow similar procedures, but has taken additional steps to improve fingerprint image quality. They include refining training manuals used to instruct local census office staff on how to take fingerprints, scheduling fingerprint training closer to when the prints are captured, and increasing the length of training. Further, the Bureau plans on using an oil-free lotion during fingerprinting that is believed to raise the ridges on fingertips to improve the legibility of the prints. The Bureau has also revised its procedures for refingerprinting employees when both fingerprint cards cannot be read. During address canvassing, if both sets of fingerprints were unclassifiable, workers were allowed to continue working if their name background check was acceptable, and would be refingerprinted only if they were rehired for future operations. Under the revised policy, the Bureau plans to digitally capture a third and fourth set of fingerprints if the FBI cannot classify the first two sets. The Bureau plans to purchase approximately 1,017 digital fingerprint scanners. Each local census office will receive a minimum of one machine, with the remaining scanners to be distributed at the discretion of the Regional Director. The Bureau estimates that this additional step could reduce the percentage of workers with unclassifiable prints from 22 percent down to approximately 10 to 12 percent, or an estimated 60,000 to 72,000 temporary workers for NRFU. We did not receive a response from the Bureau whether it will allow those workers with unclassifiable prints to continue to work on NRFU operations. During the decennial census, the Bureau conducts separate operations to count people residing in group quarters facilities. The Bureau defines group quarters as "places where people live or stay in a group living arrangement that are owned or managed by an entity or organization providing housing and/or services for the residents," such as boarding schools, correctional facilities, health care facilities, military quarters, and college and university housing. According to Bureau estimates, more than 8.1 million people, or approximately 3 percent of the population, live in group quarter facilities. During the 2000 Census, the Bureau did not always accurately enumerate group quarters because, among other reasons, group quarters were sometimes hard to distinguish from conventional housing units (see fig. 2), or the address of an administrative building was in a separate geographic location than where the people actually lived, as was sometimes the case with prison complexes. For example, in prior work, we found that the population count of Cameron, Missouri, was off by nearly 1,500 people because the population of the state's Crossroads Correctional Center was inadvertently omitted from the town's headcount. Similarly, North Carolina's population count was reduced by 2,828 people, largely because the Bureau had to delete duplicate data on almost 2,700 students in 26 dormitories (see fig. 3) at the University of North Carolina at Chapel Hill (UNC). Precision is critical because, in some cases, small differences in population totals could potentially impact apportionment and/or redistricting decisions. The Bureau developed and tested new procedures to address the difficulties it had in identifying and counting this population during the 2000 Census. For example, the Bureau moved from manual to GPS- generated mapspots, which should reduce the chance of human error and group quarters populations being counted in the wrong jurisdiction; moved from a telephone interview to a field verification approach, which should increase accuracy; and moved to a single address list, which should reduce the chance of double counting. In addition, following the 2004 Census Test, we recommended that the Bureau revisit group quarter procedures to ensure that this population was properly located and counted. The Bureau implemented our recommendation and revised its group quarters procedures to clearly instruct census workers to properly correct and delete addresses. Further, to better ensure a more accurate group quarters count, the Bureau employed a three-prong effort consisting of those operations shown in table 2. For the 2010 group quarters operations, the Bureau drew from a number of sources to build its list of group quarters addresses including data from the 2000 Census, address submissions provided by state and local governments, Internet-based research, and group quarters located during door-to-door address canvassing. During the first of the three group quarters operations (group quarters validation), approximately 25,000 temporary workers identified over 240,000 group quarters facilities from a workload of over 2 million potential group quarters in both the United States and Puerto Rico. The remaining approximately 1.76 million addresses were identified during group quarters validation as conventional housing units, transitory locations, nonresidential, nonexistent, or duplicates. All addresses that were verified as housing units or transitory locations were added to the appropriate address extracts for subsequent enumeration operations. In addition, over 7,000 addresses from the group quarters validation workload could not be properly processed in the Bureau's database because they were returned with insufficient information. However, a contingency plan was implemented to ensure these locations were included in the census. The changes made to group quarters operations appear promising, and the Bureau plans to evaluate coverage of the group quarters population. However, the Bureau will not evaluate each of the three group quarters operation's effectiveness, cost, or value added. Such evaluations could be useful in improving the operations, identifying possibly duplicative operations, and identifying potential cost savings for 2020. For example, given the large number of non-group quarters included in the workload for group quarters validation (about 88 percent), the Bureau may want to consider ways to begin the operation with a more concise initial workload. Additionally, in both group quarters validation and group quarters advance visit operations, census workers personally visit group quarters, verify the facility contact information, provide confidentiality information, and collect occupancy numbers. Because these activities appear to be duplicative, the Bureau may want to reexamine the need to conduct both operations. A complete and accurate census is becoming an increasingly daunting task, in part because the nation's population is growing larger, more diverse, and more reluctant to participate. To overcome these challenges, the Bureau has developed the Integrated Communications Campaign aimed at, among other things, improving the mail response rate and reducing the differential undercount. An undercount occurs when the census misses a person who should have been included; an overcount occurs when an individual is counted in error. What makes these errors particularly problematic is their differential impact on various subgroups. Minorities, renters, and children, for example, are more likely to be undercounted by the census while more affluent groups, such as people with vacation homes, are more likely to be enumerated more than once. As shown in table 3, the 2010 communications campaign consists of four components: the partnership program, paid advertising, public relations, and an educational program called Census in Schools. The 2010 communications campaign's initial budget of $410 million was increased by $220 million in additional funds appropriated by the American Recovery and Reinvestment Act of 2009 (Recovery Act). As a result, the Bureau was able to greatly expand its communications campaign activities. For example, the Bureau hired about 3,000 partnership staff, over 2,000 more than originally planned, and increased its paid advertising purchases targeted to specific ethnic or language audiences by more than $33 million (85 percent) over its initial plan of about $39 million. The increased funding should enhance the Bureau's capacity to reach out to hard-to-count communities. In all, the Bureau plans to spend about $72 million on paid advertising targeted to specific ethnic or language audiences, which is about $11 million more than the almost $61 million the Bureau plans to spend targeting the general population. However, even with the additional Recovery Act funds, the Bureau plans to spend less for some components of the 2010 paid media buys than it did for 2000, when compared in constant 2010 dollars. For example, although the total budget for the 2010 paid advertising is $253 million, which is about $12 million (5 percent) more than 2000, the Bureau plans to spend about $133 million of it on the total advertising buy (excluding production, labor, and other management costs), which is about $27 million (17 percent) less compared to the about $160 million spent in 2000. Table 4 shows the Bureau's 2010 budget for paid media buys by target audience compared to what was spent in 2000. Decreased spending on paid advertising may seem like a step in the wrong direction for promoting census participation. However, by better targeting paid advertising buys the Bureau expects to reach those who have historically been the hardest to count. For example, the Bureau based its decisions on how to allocate spending across different ethnic and language audiences based on a variety of factors, such as historical response data for an area, prevalence of hard-to-count households in a market, population size, and availability of in-market media. The Bureau also received input from staff in census regional offices, as well as from an independent 2010 Census advisory group called the Race and Ethnic Advisory Committee. Further, the Bureau targeted the paid advertising messages based on market and attitudinal research. For example, the Bureau's attitudinal research identified five mindsets people have about the census, ranging from what Bureau research identified as "leading edge"--those who are highly likely to respond--to the "cynical fifth" who are less likely to participate because they doubt that the census provides tangible benefits. The Bureau used this information to develop messages to motivate each cohort to participate in the census. To target the cynical fifth, for example, the Bureau developed advertising that focus on the message that the census is important to their community. In addition, as shown in table 5, the Bureau has made other noteworthy changes to 2010 paid advertising and partnership program activities, which are aimed at expanding outreach to hard-to-count groups and better monitoring campaign effectiveness. In summary, our analysis suggests that the paid advertising and partnership activities, along with the other components of the Bureau's communications campaign, are generally more robust than the Bureau's promotional efforts during the 2000 Census in that the entire effort is more comprehensive, and activities appear to be more data-driven and targeted. Moving forward, the key challenge facing the campaign is that it must not only raise awareness of the census, it must also influence behavior, a far more difficult task. The Bureau's strategy to mail a second, or replacement, census questionnaire will be implemented for the first time in 2010 and is an important step towards improving response and decreasing costs. According to Bureau studies, mailing a replacement questionnaire increases overall response from households that do not respond to the initial questionnaire, which could generate significant cost savings by eliminating the need for census workers to obtain those responses via personal visits. The Bureau plans to mail approximately 30 million replacement questionnaires to all households in census tracts that had the lowest response rates in Census 2000 (known as blanket replacement). Also, the Bureau plans to mail approximately 12 million replacement questionnaires to nonresponding households in other census tracts that had low-to- moderate response rates in 2000 (known as targeted replacement). In order to enhance the effectiveness of the replacement mailing, the Bureau will include a cover letter to distinguish the initial and replacement questionnaires and thus avoid receiving duplicate responses. However, replacement questionnaires will be provided in English-only, regardless of whether the household will receive a bilingual English/Spanish questionnaire in the initial mailing. According to a Bureau official, mailing a bilingual replacement questionnaire was logistically impractical for 2010, given the limitations of the printing process and the five-day time frame for the targeted replacement mailing. Thus, in looking forward to the 2020 Census, it will be important for the Bureau to evaluate potential changes to the mailing strategy that would include, at a minimum, sending bilingual replacement questionnaires to those households that initially received a bilingual questionnaire. The Bureau plans to mail replacement questionnaires between April 1 and April 10 and develop an initial list of nonresponding households on April 7 (see table 6 for key dates in this process). Because the Bureau will likely receive replacement questionnaires after April 7, it must be able to effectively remove these late mail returns from the list of nonresponding households, or NRFU workload. Removing late mail returns is important because it prevents enumerators from visiting households that already returned their census forms, thus reducing NRFU workload and cost, as well as respondent burden. As shown in table 6, the Bureau plans to remove late mail returns from the NRFU workload four times using one automated and three manual processes. The Bureau has some experience with the manual process because some local census offices did some testing of late mail removals during the 2000 Census. In addition, they have developed quality assurance procedures for the manual removal process. Moving forward, it will be important for the Bureau to ensure that local census offices follow these procedures so that households are not unnecessarily visited by an enumerator or inadvertently removed from the follow-up workload and missed in the census count. The scale of the destruction in areas affected by hurricanes Katrina, Rita, and Ike has made getting a complete and accurate population count in parts of Mississippi, Louisiana, and Texas especially challenging (see fig. 4). Hurricane Katrina alone destroyed or made uninhabitable an estimated 300,000 homes. As we have previously testified, the Bureau, partly in response to recommendations made in our June 2007 report, developed supplemental training materials for natural disaster areas to help census address listers, when developing the census address list, identify addresses where people are, or may be, living when census questionnaires are distributed. For example, the materials noted the various situations that address listers might encounter, such as people living in trailers, homes marked for demolition, converted buses and recreational vehicles, and nonresidential space such as storage areas above restaurants. The training material also described the clues that could alert address listers to the presence of nontraditional places where people are living and provided a script they should follow when interviewing residents on the possible presence of hidden housing units. To ensure a quality count in the hurricane-affected areas, the Bureau will hand-deliver an estimated 1.2 million census questionnaires in these areas through the Update Leave operation, where census workers update addresses and provide a mail-back census questionnaire to each living quarter in their assigned areas. The Bureau estimates that it will be delivering questionnaires starting March 1, 2010, to housing units that appear inhabitable in much of southeast Louisiana, south Mississippi, and Texas, even if they do not appear on the Bureau's address list. Occupants will be asked to complete and return the questionnaire by mail. Census workers will also identify modifications for the Bureau's address list, including additions, deletions, corrections, and spotting duplicate information. By hand delivering questionnaires, the Bureau hopes to ensure that housing units that may have been missed will receive and return questionnaires, ultimately improving the accuracy of the count. Finally, the Bureau stated that it must count people where they are living on Census Day and emphasized that if a housing unit gets rebuilt and people move back before Census Day, then that is where those people will be counted. However, if they are living someplace else, then they should be counted where they are living on Census Day. Mr. Chairman, with less than two months to go until Census Day, the Bureau's readiness for the headcount is mixed. On the one hand, with data collection already underway, the ability of key IT systems to function under full operational loads has not yet been demonstrated. The issues facing these systems need to be resolved, and additional testing must take place, with little time remaining. Likewise, questions remain regarding the ultimate cost of the 2010 Census, as the Bureau continues to analyze the cost of NRFU-related operations. On the other hand, certain operations, such as the communications campaign and efforts to enumerate group quarters, generally appear to be on track and more robust compared to similar efforts for the 2000 Census, better positioning the Bureau for a complete and accurate headcount. In the coming weeks and months ahead, we will continue to monitor the Bureau's progress in addressing these issues, as well as the implementation of the census as a whole, on behalf of the Subcommittee. Mr. Chairman and members of this Subcommittee, this concludes my statement. I would be happy to respond to any questions that you might have at this time. If you have any questions on matters discussed in this statement, please contact Robert N. Goldenkoff at (202) 512-2757 or by e-mail at [email protected]. Other key contributors to this testimony include Peter Beck, Steven Berke, Clayton Brisson, Virginia Chanley, Benjamin Crawford, Dewi Djunaidy, Vijay D'Souza, Jennifer Echard, Elizabeth Fan, Ronald Fecso, Robert Gebhart, Ellen Grady, Richard Hung, Kirsten Lauber, Jason Lee, Andrea Levine, Signora May, Catherine Myrick, Lisa Pearson, David Powner, Jonathan Ticehurst, Cheri Truett, Timothy Wexler, and Katherine Wulff. 2010 Census: Census Bureau Has Made Progress on Schedule and Operational Control Tools, but Needs to Prioritize Remaining System Requirements. GAO-10-59. Washington, D.C.: November 13, 2009. 2010 Census: Efforts to Build an Accurate Address List Are Making Progress, but Face Software and Other Challenges. GAO-10-140T. Washington, D.C.: October 21, 2009. 2010 Census: Census Bureau Continues to Make Progress in Mitigating Risks to a Successful Enumeration, but Still Faces Various Challenges. GAO-10-132T. Washington, D.C.: October 7, 2009. 2010 Census: Communications Campaign Has Potential to Boost Participation. GAO-09-525T. Washington, D.C.: March 23, 2009. 2010 Census: Fundamental Building Blocks of a Successful Enumeration Face Challenges. GAO-09-430T. Washington, D.C.: March 5, 2009. Information Technology: Census Bureau Testing of 2010 Decennial Systems Can Be Strengthened. GAO-09-262. Washington, D.C.: March 5, 2009. 2010 Census: The Bureau's Plans for Reducing the Undercount Show Promise, but Key Uncertainties Remain. GAO-08-1167T. Washington, D.C.: September 23, 2008. 2010 Census: Census Bureau's Decision to Continue with Handheld Computers for Address Canvassing Makes Planning and Testing Critical. GAO-08-936. Washington, D.C.: July 31, 2008. 2010 Census: Census Bureau Should Take Action to Improve the Credibility and Accuracy of Its Cost Estimate for the Decennial Census. GAO-08-554. Washington, D.C.: June 16, 2008. Census 2010: Census at Critical Juncture for Implementing Risk Reduction Strategies. GAO-08-659T. Washington, D.C.: April 9, 2008. Information Technology: Census Bureau Needs to Improve Its Risk Management of Decennial Systems. GAO-08-79. Washington, D.C.: October 5, 2007. 2010 Census: Basic Design Has Potential, but Remaining Challenges Need Prompt Resolution. GAO-05-9. Washington, D.C.: January 12, 2005. 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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In March 2008, GAO designated the 2010 Census a high-risk area in part because of information technology (IT) shortcomings and uncertainty over the ultimate cost of the census, now estimated at around $15 billion. The U.S. Census Bureau (Bureau) has since made improvements to various IT systems and taken other steps to mitigate the risks of a successful census. However, last year, GAO noted that a number of challenges and uncertainties remained, and much work remained to be completed under very tight time frames. As requested, this testimony provides an update on the Bureau's readiness for an effective headcount, covering (1) the status of key IT systems; (2) steps the Bureau has taken to revise its cost estimates; and (3) the extent to which critical enumeration activities, particularly those aimed at hard-to-count populations, are on track. The testimony is based on previously issued and ongoing GAO work. Overall, the Bureau's readiness for a successful headcount is mixed. On the one hand, ongoing performance issues are affecting key IT systems, especially a workflow management system essential for the Bureau's field operations and a payroll processing system that will be used to pay more than 1 million temporary workers. Indeed, an important performance test the Bureau held in December 2009 revealed significant performance issues with each system. Bureau officials stated that many of these issues were resolved in further testing; however, others remain unresolved, and new defects were identified. The Bureau is going to great lengths to address these issues. However, little time remains before the systems need to become fully operational. In addition, the Bureau revised its cost estimate from $2.7 billion to $2.3 billion for nonresponse follow-up, the largest and most costly field operation where census workers follow up in person with nonresponding households. However, the Bureau's analyses of cost are not complete. According to the Bureau, it continues to reexamine the cost of two other nonresponse follow-up related operations. On the other hand, the rollout of key enumeration activities is generally on track, and the Bureau has taken action to address some previously identified problems. For example, the Bureau has taken several steps to reduce the number of unreadable fingerprint cards of temporary workers, a problem that plagued an earlier field operation. Among other actions, the Bureau plans to digitally capture a third and fourth set of fingerprints if the first two sets cannot be read for background security checks. The Bureau has also developed new procedures for counting those living in group quarters, such as dormitories and prisons. For example, the Bureau is using a single address list containing both group quarters and housing units, rather than separate lists as in the 2000 Census, to reduce the chance of double counting. The Bureau's 2010 Census communications campaign is also more robust than the one used in the 2000 Census. Key differences from the 2000 campaign include increased partnership staffing, targeted paid advertising based on market and attitudinal research, and a contingency fund to address unexpected events. To increase participation rates, the Bureau plans to mail a second, replacement questionnaire to census tracts that had low or moderate response rates in the 2000 Census. To help ensure a complete count of areas along the Gulf Coast, the Bureau plans to hand deliver an estimated 1.2 million census forms in areas devastated by hurricanes Katrina, Rita, and Ike. This effort will help ensure that households--even those that were not on the Bureau's address list but appear inhabitable--will be included in the census. Moving forward, it will be important for the Bureau to quickly identify the problems affecting key IT systems and test solutions. Further, given the complexity of the census and the likelihood that other glitches might arise, it will be important for the Bureau to stay on schedule, monitor operations, and have plans and personnel in place to quickly address operational issues.
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The Food Stamp Program helps recipients--individuals and families with low incomes--to obtain a more nutritious diet by providing food stamp benefits to supplement the funds they have to spend on food. Recipients must use their food stamp benefits to purchase only allowable food products from retail food stores that FNS authorizes to participate in the program. FNS administers the program in partnership with the states. FNS funds all of the program's food stamp benefits and about 50 percent of the states' administrative costs. FNS is primarily responsible for developing the program's policies and guidelines, authorizing retail food stores to participate in the program, and monitoring retailers' compliance with the program's requirements. The states are responsible for handling the day-to-day operation and management of the program, including such duties as certifying the eligibility of individuals or households to participate in the program, delivering the benefits to recipients, and monitoring recipients' compliance with the program's requirements. Recipients use food stamp coupons or an electronic benefit transfer (EBT) card to pay for allowable foods. EBT systems that provide food stamp benefits to recipients use the same electronic funds transfer technology that many grocery stores use for their debit card payment systems. A food stamp recipient receives an EBT card and a personal identification number, and the recipient authorizes transfer of the food stamp benefits from a federal account to a retailer account to pay for the food received. At the grocery checkout counter, the recipient's card is run through an electronic reader and the recipient enters the secret personal identification number to access the food stamp account. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 mandates that all states implement EBT systems before October 1, 2002, unless USDA waives the requirement. As of March 1998, 16 states had implemented EBT systems statewide. Twelve of these states deliver multiple program benefits with their EBT systems, including other federal and state programs. Additionally, 14 states use EBT systems in selected counties, and most of these states are in the process of expanding these systems statewide. All the remaining states are in the process of implementing EBT systems. Collectively, EBT systems supply about 40 percent of all food stamp benefits. According to a 1995 FNS study, about $815 million, or about 4 percent of the food stamps issued, was trafficked--exchanged for cash--by about 9 percent of the authorized retailers during fiscal year 1993. Supermarkets and large grocery stores redeemed 82.5 percent of all food stamp benefits and had an average trafficking rate of 1.9 percent of the benefits redeemed. In contrast, smaller stores redeemed 17.5 percent of the benefits and had an average trafficking rate of 13.0 percent of the benefits redeemed. Table 1 shows the percentage of benefits redeemed and trafficking rates by type of store. In addition, this study found that privately owned stores had much higher trafficking rates than publicly owned stores (i.e., retailers whose stock is traded publicly). For example, publicly owned stores had an average trafficking rate of .2 percent of redemptions. In comparison, privately owned stores had an average trafficking rate of 5.3 percent of redemptions. Like FNS, we found, in our analysis of the 432 cases of food stamp trafficking, that most trafficking occurred in small privately owned retail stores. About 98 percent of the stores engaged in trafficking were small groceries. Only seven stores, about 2 percent, were supermarkets with over $2 million in gross sales. The amount of trafficking may have changed since FNS conducted its 1995 study, which did not consider the effect of EBT. Since then, about 40 percent of food stamp benefits nationwide are supplied electronically, which allows easier identification of food stamp trafficking. Therefore, an analysis of the extent of trafficking using electronic data may indicate that violations are now occurring at a greater or lesser rate. USDA is primarily responsible for monitoring the Food Stamp Program to detect trafficking and for imposing administrative sanctions. Justice is responsible for prosecuting cases referred to it by federal agencies. Each agency's responsibilities are summarized below. Within USDA, FNS and the Office of Inspector General (OIG) are responsible for monitoring program compliance by the approximately 185,000 stores currently authorized to redeem food stamps. While both agencies identify and investigate possible food stamp trafficking, FNS has the sole authority to impose administrative sanctions on violators, and the OIG concentrates on potential criminal investigations. FNS and OIG identify possible violators through several sources: allegations from USDA's hotline and analyses of data in FNS' Store Tracking and Redemption System (STARS) and EBT systems. Of these sources, STARS provides the most comprehensive information. FNS and the OIG use this system to monitor stores' redemptions of food stamps and to identify retailers for investigation. STARS has a profile of each store, including sales volume, and tracks monthly food stamp redemptions. FNS uses this system to ensure that store owners caught trafficking and disqualified from the Food Stamp Program do not reenter the program. However, FNS officials told us that they do not currently track clerks caught trafficking to keep them out of the program or to help prosecute repeat offenders. They said that FNS plans to implement a system later this year to track these clerks. More recently, FNS and the OIG have begun using data from state EBT systems to identify possible cases of food stamp trafficking. More specifically, all states using EBT systems must provide their data on food stamp transactions to FNS for analysis. These data include the date, time, and amount of the sale; the store authorization number and cashier number; and the recipient's identification number. Both FNS and OIG personnel analyze the EBT data using a computer program that identifies individual transactions or transaction patterns that indicate trafficking may be occurring. The use of EBT data has a particular advantage: Under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, federal agencies may use EBT data alone, without the expense of conducting an undercover investigation, to take action against retailers violating the requirements of the Food Stamp Program. USDA has cited the implementation of EBT systems as a significant step forward in identifying and combating food stamp trafficking. Once retail stores are identified as possible violators, FNS' Compliance Branch, the OIG, or both conduct an investigation. Violations of the Food Stamp Act include trading food stamp benefits for cash (at a discount, such as 70 cents on the dollar) or for nonfood items. FNS takes administrative action against identified violators, such as disqualifying them from the program permanently or temporarily and/or imposing civil fines up to $40,000. FNS also refers cases to the OIG when it believes that a significant amount of trafficking has been occurring at a store and that a more complex case needs to be developed for prosecution. FNS investigated over 38,700 retail stores during fiscal years 1990 through 1997 and found violations of the Food Stamp Program in about 17,600 stores. Table 2 shows that FNS identified over 5,700 trafficking cases during this period. It also shows that for the same period, the OIG accepted only about one-fifth of those cases for investigation, primarily because it did not have the resources to investigate a larger number of cases. The FNS cases not investigated by the OIG were returned to FNS, which can take administrative action against the violators. Within USDA, the OIG is responsible for all criminal investigations and for coordinating the trafficking cases with the Department of Justice and other federal, state, and local agencies. The OIG investigates cases referred from FNS and initiates its own investigations using sources similar to FNS'. Table 3 shows that during fiscal years 1990 through 1997, the OIG reported on 5,551 investigations. In addition to the investigations conducted by FNS and the OIG, the states sometimes work with these federal agencies to investigate retailers' fraud or abuse in the program. For example, under agreements with states' law enforcement agencies, FNS provides the states with food stamp coupons to use in conducting their own trafficking investigations. According to FNS, although it has established agreements with 32 states, only 10 have conducted sustained efforts against food stamp trafficking. The OIG has the sole authority for referring trafficking cases to federal, state, or local authorities for prosecution under criminal statutes. Criminal penalties can include fines of up to $250,000 and/or jail sentences of up to 20 years. According to USDA data, during fiscal years 1990 through 1997, Justice and state and local governments prosecuted about 2,650 trafficking cases that had been investigated by the OIG, resulting in about 4,800 indictments, 4,300 convictions, and over $70 million in fines, restitutions, and recoveries. Justice can prosecute traffickers criminally and may pursue civil recovery under the False Claims Act. Justice has 93 U.S. attorneys, one in each federal judicial district, who decide whether to prosecute individual cases of food stamp trafficking. In addition, Justice's Civil Division also has the authority to prosecute traffickers. According to Justice officials, U.S. attorneys have wide discretion to establish priorities based on the needs of their local jurisdictions and the guidelines set forth in The Principles of Federal Prosecution, as well as various national initiatives and priorities. Therefore, U.S. attorneys prosecute some food stamp trafficking cases while referring others to state or local prosecutors. However, we noted that many food stamp trafficking cases are not prosecuted by federal, state, or local prosecutors. In the absence of criminal prosecution, both the OIG and FNS refer significant trafficking cases to the Department of Justice for action under civil statutes. Civil money penalties, which come under the False Claims Act, can include fines of between $5,000 to $10,000 plus damages of three times the amount of food stamps involved in the trafficking. During fiscal year 1997, 82 settlements of false claims, which USDA had referred to Justice, amounted to civil money penalties of about $1.2 million. Since 1992, when USDA began referring cases to Justice, 566 false claims totaling over $5.9 million have been settled. Our analysis of the 432 cases of food stamp trafficking shows that store owners alone were involved in 40 percent of the cases, clerks alone were involved in 47 percent of the cases, and store owners and clerks together were involved in 13 percent of the cases. In every case, FNS disqualified the store owner from participating in the Food Stamp Program or assessed a monetary penalty against the store owner. Additionally, federal, state and local courts took action against store owners in 92 cases and store clerks in 43 cases. Court-ordered penalties ranged from fines to jail sentences. FNS took administrative action against the store owners in all 432 cases we reviewed. The large number of actions against store owners reflects the fact that, under the Food Stamp Program, store owners are legally responsible for any trafficking occurring in their stores, regardless of who was involved. Specifically, store owners in 410 cases were permanently disqualified from the program, owners in 18 cases were temporarily disqualified, and owners in 4 cases paid civil money penalties to FNS in lieu of being disqualified. In addition, FNS assessed administrative financial penalties totaling $1,077,062 against store owners in 175 cases. (See app. I for more information on the administrative actions FNS took against the 432 store owners.) In addition to FNS' administrative penalties, federal, state, or local courts took action against store owners in 92 of the 432 cases we reviewed. In 16 cases, store owners were sentenced to jail. Most of these store owners were sentenced to less than 1 year in jail, although sentences ranged from 1 day to 2,310 days. Store owners were fined by courts in 53 cases, and in 30 cases owners were assessed fines of less than $1,000. Owners in 18 cases were assessed fines ranging from $1,001 to $10,000, and owners in 5 cases were assessed fines of over $10,000. The two largest fines were $240,745 and $24,040. According to FNS and OIG officials, the lack of resources at the OIG to conduct investigations to develop sufficient information necessary for prosecution and conviction has limited the number of court actions taken. (See app. II for more details of the court actions taken against the 432 store owners.) The following examples illustrate the court actions taken against store owners for trafficking: One store owner redeemed $4,145 in food stamp benefits for $2,050 in cash and was sentenced to 1 day in jail; another store owner redeemed $4,639 in food stamps for $2,783 in cash and received no punishment other than permanent disqualification; and another store owner redeemed $8,620 in food stamps for $4,310 in cash and received no punishment. Unlike store owners, store clerks who violate food stamp trafficking laws are not subject to FNS' administrative actions. Clerks, however, can be prosecuted in federal, state, or local courts. Store clerks were caught trafficking by USDA investigators in 260 cases. However, clerks received court-ordered actions in 43 cases, or about 17 percent of those cases. Financial penalties for 33 cases totaled $36,541, ranging from $50 to $2,793. Jail sentences in nine cases ranged from 1 day to 3-1/2 years, although most sentences were for less than 1 year. (See app. III for more information on the court actions taken against the store clerks.) The following examples illustrate the court actions taken against clerks for trafficking: One store clerk redeemed $390 in food stamp benefits for $200 in cash and was sentenced to 1 day in jail; three clerks in one store redeemed $5,600 in food stamp benefits for $3,440 in cash, and none were punished; and one clerk redeemed $885 in food stamp benefits for $532 in cash and was not punished. We provided a draft of this report to the U.S. Department of Agriculture for its review and comment. We met with Food and Nutrition Service officials, including the Director, Benefits Redemption Division, and officials from the Office of Inspector General, including the Director, Program Investigations Division. The Department concurred with the report's findings. We also provided Department of Justice officials an opportunity to comment on the sections of the report dealing with Justice. The officials of both departments provided a number of editorial and technical comments, which we have incorporated into the report where appropriate. To identify information on the extent of retailer trafficking and the characteristics of the stores engaged in such trafficking, we obtained and used USDA's 1995 report on the extent of trafficking in the Food Stamp Program and interviewed the USDA personnel responsible for that study. This study was a one-time study to estimate the extent of trafficking. We also collected information on the impact EBT has had on identifying food stamp trafficking by contacting USDA officials in eight states that had statewide EBT systems at the time we began our review. To determine the roles and efforts of various federal agencies in minimizing food stamp trafficking by retailers, we interviewed and obtained information from officials of the departments of Agriculture and Justice. Specifically, we gathered information on their responsibilities relating to food stamp trafficking and obtained data on the number of trafficking cases the two agencies have identified and for which the store owners and clerks were punished, either administratively or through the courts over the last 8 years. To determine whether store owners or clerks were generally caught for trafficking food stamps and the extent of discipline for the trafficking, we reviewed USDA's files in six states--California, Florida, Georgia, New York, South Carolina, and Texas--to identify who committed the trafficking, who was disciplined, and what disciplinary action they received. We selected these states because they currently distribute about 40 percent of the total food stamp benefits and because some of these states delivered benefits by statewide EBT systems while others did not. We obtained a computer printout from FNS headquarters of all trafficking cases in those six states in which a store owner was disqualified from the Food Stamp Program between July 1, 1996, and June 30, 1997. We then worked with personnel in FNS' regional and state offices to identify additional cases in which store owners paid a civil money penalty in lieu of being disqualified from the program. We also worked with these officials to verify the accuracy and completeness of the data. We conducted our review from April 1997 through March 1998 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce its content earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will make copies available to appropriate congressional committees; the Secretary of Agriculture; the Attorney General of the United States; and other interested parties. We will also make copies available to others on request. Please contact me at (202) 512-5138 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix IV. Not applicable. Not applicable. Ron E. Wood, Assistant Director Richard B. Shargots John K. Boyle Jacqueline A. Cook Dennis P. Dunphy William F. Mayo Carol Herrnstadt Shulman The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. 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Pursuant to a congressional request, GAO reviewed food stamp trafficking at the retail level, focusing on: (1) the extent of retailer trafficking and the characteristics of the stores engaged in such trafficking; (2) the roles and efforts of federal agencies in minimizing food stamp trafficking by retailers; and (3) whether store owners or clerks were generally caught for trafficking food stamps and the extent of discipline for the trafficking. GAO noted that: (1) according to the most recent Food and Nutrition Service (FNS) study available, about $815 million, or about 4 percent of the food stamps issued, was trafficked at retail stores during fiscal year 1993; (2) supermarkets and large grocery stores redeemed 82.5 percent of all food stamp benefits and had a combined trafficking rate of 1.9 percent of all benefits redeemed; (3) smaller grocery stores redeemed 17.5 percent of the benefits and had a combined trafficking rate of 13 percent of the benefits redeemed; (4) this study did not reflect the electronic redemption of food stamps; (5) therefore, an analysis of the extent of trafficking that includes electronic data may detect that violations are now occurring at a greater or lesser rate; (6) the Department of Agriculture (USDA) and Department of Justice (DOJ) are the principal federal agencies responsible for minimizing food stamp trafficking by retailers; (7) within USDA, both the FNS and the Office of Inspector General (OIG) are responsible for identifying and investigating retail stores engaged in trafficking; (8) FNS can take administrative actions against store owners engaged in trafficking, including disqualifying them from participating in the program and assessing fines; (9) OIG conducts criminal investigations and can refer store owners or clerks engaged in trafficking to DOJ or state or local governments for prosecution; (10) during fiscal years 1990 through 1997, FNS identified food stamp trafficking in over 5,700 retail stores, OIG investigated and reported on 5,551 trafficking cases, and DOJ and state and local governments prosecuted about 2,650 cases referred by OIG; (11) DOJ, in some jurisdictions, will pursue civil actions against store owners to collect money under the False Claims Act when it has not allocated resources to conduct criminal prosecutions or when it has a case in which the evidence for criminal prosecution is insufficient; (12) since 1992, when USDA began referring cases to DOJ, 566 false claims totalling over $5.9 million have been settled; (13) in the 432 food stamp trafficking cases GAO reviewed, store owners alone were caught trafficking in about 40 percent of the cases, and store owners and clerks together were caught trafficking in 13 percent of the cases; and (14) FNS permanently or temporarily disqualified the owners caught trafficking from participating in the Food Stamp Program in 428 cases and assessed financial penalities totalling $1.1 million against owners in 175 cases.
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To implement a changing and highly technical tax code, IRS publishes approximately 400 tax forms and accompanying instructions each year. More detailed guidance is provided in approximately 100 different publications. Frequent changes to the tax laws necessitate revisions to both forms and publications. The development and revision of tax forms and their accompanying instructions and publications are the responsibility of IRS' Tax Forms and Publications Division. This division is made up of two branches, the Forms Branch and the Publications Branch. Tax forms and instructions are written by tax law specialists in the Forms Branch. Proposed new forms are reviewed by IRS' Tax Forms Coordinating Committee (TFCC), which represents all major organizational units in IRS. TFCC provides a forum for all key IRS functions to help ensure that forms meet the overall needs of the agency without placing excessive burden on taxpayers. All new forms and major revisions to existing forms must be approved by TFCC. IRS' Chief Counsel must also approve the forms to ensure their technical accuracy and consistency with laws and regulations. The Office of Management and Budget (OMB) is responsible for reviewing each tax form once every 3 years. The purpose of OMB's review is to assess IRS' compliance with the Paperwork Reduction Act. Among other things, this law compels OMB to evaluate the extent of burden imposed by IRS forms and to ensure that the federal paperwork burden for individuals is minimized. As a consequence, all new forms and major revisions to existing forms must also be reviewed by OMB. Tax law specialists in the Publications Branch write and revise publications. Some publications are designed to accompany specific forms, while others provide general information relating to a variety of forms. Because publications supplement information on forms and instructions, they are not subject to TFCC review or OMB approval. Publications are also periodically revised to reflect changes to the tax laws or forms. Each year, some publications are substantively revised through an intensive review by a team that includes tax law specialists, writer-editors, and technical reviewers associated with the publication's subject matter. These publications are subjectively selected on the basis of circulation and the need for text revision. The objective of this revision is to make a major improvement in the quality and usefulness of the publication. In 1978, we issued a report citing the tension between IRS' conflicting responsibilities to develop forms that are technically accurate, yet clear and readable. In that report, we noted that writer-editors and graphic experts played a limited role in the development of only a few forms and that, as a result, technical accuracy was favored at the expense of clarity. While acknowledging the importance of being accurate, we reported that the readability of these documents needed improvement. Our report recommended that IRS institutionalize a broader mix of writing and graphics design experts in a continuous review of forms and instructions. Since then, IRS has made greater use of its writer-editors and included more graphics in its forms and publications. Our objectives were to (1) evaluate IRS' forms and publications development and revision process, (2) identify IRS' efforts to improve this process, and (3) identify IRS' initiatives to increase involvement of taxpayers in this process. To assess IRS' process for developing and revising forms and publications, we examined the agency's written procedures and discussed them with representatives from IRS' Tax Forms and Publications Division, the unit with primary responsibility for issuing these documents. We also selected four forms and two publications and tracked their progress through the development and revision phase. We included forms and publications used by individuals and businesses as well as newly created forms and existing forms undergoing revision. To verify IRS' written procedures and information obtained from IRS officials, we identified the actual steps taken in producing these documents and compared these activities to established procedures. To evaluate the reasonableness of IRS' process for developing and revising forms and publications, we considered whether its procedures provided for clear lines of responsibility and accountability, specific timeframes, adequate management oversight, sufficient opportunities to evaluate suggestions from internal and external sources, and appropriate strategies for coping with sudden tax law changes. We also interviewed IRS officials involved in preparing these documents and asked them to discuss the development and revision process. To identify IRS' efforts to improve the process and to increase taxpayers' involvement in it, we interviewed IRS officials. In addition, we met with OMB officials to discuss OMB's role in reviewing tax forms for compliance with the Paperwork Reduction Act. We also met with representatives from external professional organizations, which are concerned with the clarity and accuracy of IRS forms and publications. Our discussions with these groups focused on their perceptions of IRS' willingness to hear their views and to maintain a professional dialogue on matters affecting IRS forms and publications. Appendix I lists these organizations. We also discussed agency initiatives to improve the clarity of tax forms and publications with various IRS officials involved in managing these activities. We did our work at IRS' National Office in Washington, D.C., from August 1993 to April 1994 in accordance with generally accepted auditing standards. We presented a draft version of this report to appropriate IRS officials including the Chief of Strategic Planning and Communications and the Director of the Tax Forms and Publications Division and obtained oral comments from them on October 25, 1994. IRS' comments and our evaluation are on page 11 of this report. IRS' forms and publications are based on a complex and frequently changing tax code. Since 1980, Internal Revenue Code sections have been amended more than 100 times, resulting in numerous modifications to existing forms and the development of nearly 100 new ones. This combination presents a great challenge to IRS, which is expected to issue documents that are not only technically accurate but readable. IRS is responsible for responding to changes in the tax law by modifying forms and publications and issuing forms on a timely basis. In addition to revisions caused by changes in tax law, IRS reviews all forms for possible revision on a periodic basis. Many forms, such as the Form 1040, "U.S. Individual Income Tax Return," are for use during a particular tax year and must be updated annually. Other forms, such as the Form 709, "United States Gift (and Generation Skipping Transfer) Tax Return," may have an extended period of use. IRS automatically considers all forms for revision every 3 years before sending them to OMB for review under the Paperwork Reduction Act. According to IRS officials, the agency currently publishes approximately 400 forms of which about 80 percent are revised each year. Factors beyond IRS' control may complicate its ability to provide clear forms and publications. Its role as a data gatherer for research purposes may have a direct bearing on form clarity. Some forms may include lines requesting information unrelated to computation of the tax. This information may be gathered for valid statistical or research purposes, but the information may have no bearing on tax liability. These lines may also be intended to aid an IRS examiner conducting an audit. Although these data collection efforts may bear no relationship to tax liability and may actually increase taxpayer burden, they may also serve valuable purposes justifying their presence. In addition, the varying literacy levels of taxpayers, the many forms and publications and their relationships to each other, and the sheer number of annual changes, even those adopted for the sake of clarity, can further contribute to general confusion among taxpayers. We found that IRS' process for developing new forms and publications and revising existing ones is composed of reasonable components. For example, its procedures (1) establish well-defined roles and responsibilities for staff, clear lines of accountability, and specific timeframes for drafting these documents and (2) ensure sufficient management oversight. In addition, the procedures provide steps to accommodate the passage of legislation late in the calendar year. IRS officials involved in this process identified no major problems with agency procedures that would hamper their ability to create and revise forms and publications, and the officials were generally satisfied with the procedures. Representatives from the professional organizations we interviewed also were generally satisfied with IRS' process. Our tracking of four forms and two publications also indicated that IRS' procedures were followed and proved reasonable. IRS has taken steps to build greater readability into its development and revision process since we issued our prior report in 1978. Greater use is now being made of writer-editors. While writer-editors were rarely used at the time of our previous report, they now play an integral role in simplifying language and assisting in the development of suitable graphic presentations intended to enhance readers' understanding. As part of its annual revisions process, IRS obtains suggestions for improving both the accuracy and clarity of its forms and publications from a variety of internal and external sources such as organizations representing tax professionals and tax preparers, taxpayers, and employees. All suggestions are to be referred to an appropriate tax law specialist for consideration during a document's next scheduled revision. IRS has established an ongoing dialogue with some of these organizations and addresses many of their concerns during meetings or through written responses. Some of these organizations, such as the American Institute of Certified Public Accountants, annually submit written suggestions to IRS. Others, such as the National Association of Enrolled Agents, prefer to provide occasional suggestions on an as-needed basis. These groups sometimes hold conflicting opinions, and IRS must balance their views along with many other factors in making revisions. Although no organization has all of its suggestions implemented, most of the ones we spoke with expressed satisfaction with IRS' accessibility and the process itself. IRS recognizes that more efforts need to be devoted to enhancing readability, and the agency is taking steps consistent with its mission of improving customer service and informing and educating taxpayers. The agency's new Business Master Plan for 1995 through 2001 has identified maximizing customer satisfaction and reducing taxpayer burden as one of its objectives. One of the steps IRS plans to take to achieve this objective is the establishment of form simplification teams. Comprised of IRS field personnel, these teams will be charged with performing in-depth reviews of selected forms and simplifying at least four each year. This effort is to be modelled after an earlier forms improvement project that IRS officials considered successful. Simplified versions of approximately 25 high-volume forms were drafted by field personnel during that previous project. IRS officials expect that these new teams will meet with similar success. A major effort stems from IRS' realization that taxpayers have difficulty understanding its forms and publications, even when the reading level of these documents is relatively low. IRS' Compliance Research Division is studying factors influencing taxpayer's comprehension of tax documents. IRS has concentrated its efforts on how the following 10 factors affect reader comprehension: readability, if-then statements, references to other documents, tax vocabulary, abbreviations and acronyms, arithmetic complexity, headings, text, negative terminology, and graphic usage. On the basis of these factors, selected passages of the Form 1040 and Form 1040EZ instructions were rewritten and tested to see if comprehension improved. IRS is now validating its methodology for this study. Ultimately, IRS hopes to improve taxpayer comprehension by using the study's findings to develop training for staff involved in writing forms and publications. Another development that may improve the quality of the forms and publications is the possible reorganization of the Tax Forms and Publications Division. Currently under consideration, this reorganization would result in tax law specialists' becoming responsible for preparing related forms and publications. Presently, Forms Branch staff are not involved in the development of publications. Similarly, Publications Branch staff do not prepare forms. According to IRS officials, if implemented, the reorganization would merge staff into two new branches, one addressing individual tax issues and the other addressing business tax issues. Tax law specialists would be assigned one or more forms and accompanying publications. IRS is considering whether such a reorganization would make forms and publications more readable for taxpayers by improving staff expertise and achieving greater consistency in language between the forms and publications among other things. According to IRS officials, the decision on this reorganization has been postponed pending completion of IRS' broader internal review of its processes. While IRS gets information on the clarity of forms and publications for individual taxpayers from several sources, IRS officials acknowledge that there is not a systematic way for obtaining input from the many individual taxpayers not represented by particular interest groups or associations. These officials told us that IRS has not met with the same success in obtaining the views of individual taxpayers as it has attained among the business community and organizations of tax professionals, but the agency has several efforts underway that may help to improve this situation. To obtain the views of individual taxpayers on such matters as the clarity of forms and publications, IRS solicits written comments from taxpayers, holds periodic town meetings where taxpayers can discuss their concerns, distributes customer satisfaction surveys, and conducts focus group sessions on selected forms revisions. However, IRS officials said that these sources generally do not yield many substantive insights as to what specifically confuses individual taxpayers. IRS officials have told us that the concerns expressed by individuals in these forums have not presented a precise view as to what individuals find wrong with the forms. According to these officials, they also do not generally result in useful suggestions for revising the forms. However, the officials said that while focus groups generally provide better results, the groups are costly to conduct. Because of this cost factor, only a limited number of focus groups are held. Also, focus groups do not cover a broad base of taxpayers and only address one or two forms each year. Nonetheless, officials told us that IRS hopes to find new ways of identifying the concerns of individuals. In an effort to better capture these concerns, the Publications Branch will resume its annual interviews with the agency's telephone assistors, who respond to questions from taxpayers on the toll-free telephone system. Conducted at the end of the filing season to discuss commonly asked questions and points of confusion, these interviews were previously used to identify and clarify passages in forms and publications for future revisions. Publications Branch staff claim that these interviews yielded hundreds of specific suggestions that were ultimately adopted. These interviews were discontinued several years ago due to budgetary constraints. IRS recently decided to resume these interviews in the spring of 1995, after the next filing season. This approach may be one way to tap into existing sources of information. IRS plans to introduce an additional new feature to its toll-free telephone system in January 1995. A new line will be dedicated to taxpayers who wish to leave recorded messages with the agency. Also, the annual "Message from the Commissioner," which will be included in the 1994 tax packages, will invite taxpayers to call IRS with their ideas for making the forms simpler. IRS hopes these actions will make it easier for taxpayers to comment on forms and publications and will generate more suggestions. IRS may already possess critical information that could provide insights into what areas taxpayers are specifically having difficulty in understanding. For example, IRS' existing toll-free telephone system may be a source of information as to what taxpayers find confusing. Tracking specific questions at routine intervals may identify specific sections of forms and publications that taxpayers have difficulty understanding. IRS does limited monitoring of the nature of these calls but information captured is too broad to provide specific guidance for form revision. At least one state relies on call-tracking as an indicator that certain passages in its state tax forms are confusing and uses this information to make appropriate changes to these documents. Taxpayers could also benefit from improved use of observations from IRS employees. One potential source of information may be errors made by taxpayers and discovered by IRS during audits. While some errors are inevitable and others may be indicators of intentional noncompliance, some frequently made errors may point to ambiguities in forms and publications, leaving the taxpayer open to an honest mistake. Another opportunity to simplify forms and publications frequently used by individual taxpayers may reside in the agency's annual process for proposing legislative changes to Congress. Each year the Department of the Treasury asks IRS to offer suggestions to improve tax administration that need legislative approval to be implemented. The Treasury Department's ultimate objective is to provide Congress with a list of such proposals for its consideration. Simplification of tax forms is one area of tax administration that generates suggestions requiring legislative action. Tax law specialists told us that some forms contain line items or instructions required by law but no longer serving a useful purpose. Removing such line items and instructions could result in some simplified forms, but only could be accomplished by an act of Congress. However, this process has been perceived by some staff in various units, including the Tax Forms and Publications Division, as not productive. As suggestions are forwarded to officials at increasingly higher levels within IRS, then the Treasury Department, and finally at OMB (which must approve the document before it is submitted to Congress), suggested proposals are eliminated through this process. In recent years, few, if any, suggestions have been forwarded to Congress. IRS managers are presently studying ways of revising the process to make it more useful to the Treasury Department and Congress. If improved, this process may encourage greater staff participation and provide a vehicle for conveying simplification ideas, among others, to Congress. Although it faces many challenges in developing and revising forms and publications, IRS has instituted a process for doing so that includes reasonable components and is seeking opportunities for improvement. While IRS has established a dialogue with organizations representing tax professionals, it has had difficulty in identifying and responding to the needs of individual taxpayers who are not represented by any particular organization. Because clear and understandable forms and publications help to promote voluntary compliance, readability is a continuous concern. Thus, IRS should continue to seek new ways of identifying what individual taxpayers find most difficult to understand. IRS should also explore the use of potentially helpful, but untapped, sources of information that may reveal points of taxpayer confusion and use existing information in new ways. We recommend that the Commissioner of Internal Revenue direct agency staff to make additional efforts to identify the specific concerns of individual taxpayers. Identifying these concerns may be accomplished in a variety of ways, including gathering information concerning the nature of taxpayer questions received through its toll-free telephone system and soliciting information from IRS field personnel including auditors, examiners, and customer-service representatives for the sole purpose of identifying common errors made by taxpayers that may be related to confusing passages in forms and publications. We provided a draft copy of this report to, and obtained oral comments from, appropriate IRS officials, including the Chief of Strategic Planning and Communications and the Director of the Tax Forms and Publications Division. These officials suggested several technical modifications that we incorporated in our final report. While they generally agreed with the facts contained in our report and the importance of identifying the specific needs of individual taxpayers, IRS officials did not think the recommendation we proposed was necessary. The officials stated that IRS is continuously seeking the views of individual taxpayers, receiving many employee suggestions to clarify forms and publications, and using available data to improve these documents. The officials noted that IRS has additional plans to enhance customer satisfaction with regard to forms and publications. For example, in response to a 1993 customer satisfaction survey, IRS intends to develop a learning, business, and communication strategy for making forms and instructions more readable. While acknowledging that improvement is always possible, the officials stated that its many current and planned efforts will meet taxpayer needs. We agree that IRS has made efforts to improve its forms and publications. For example, IRS' efforts to identify factors influencing taxpayers' comprehension of tax documents was a positive step. We also consider its future plans to dedicate a telephone line to messages from taxpayers and to resume interviewing telephone assistors to be positive steps. However, we continue to support the need for IRS to obtain more specific information about what individual taxpayers find most confusing about forms and publications. We believe that implementing our recommendation will further clarify forms and publications, thus benefitting individual taxpayers. We are sending copies of this report to other congressional committees, the Secretary of the Treasury, the Commissioner of Internal Revenue, and other interested parties. Major contributors to this report are listed in appendix II. If you or your staff have any questions concerning the report, please call me on (202) 512-9110. American Institute of Certified Public Accountants, Washington, D.C. American Payroll Association, New York American Society of Payroll Management, New York National Association of Enrolled Agents, Rockville, MD National Taxpayers Union, Washington, D.C. Tax Executives Institute, Washington, D.C. Linda Schmeer, Evaluator Donald R. White, 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. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO provided information on the accuracy and clarity of the Internal Revenue Service's (IRS) forms and publications, focusing on: (1) the adequacy of the process IRS uses to revise its tax forms; (2) IRS efforts to improve this process; and (3) IRS efforts to increase taxpayer involvement in the process. GAO found that: (1) IRS efforts to provide taxpayers with accurate and easy-to-read tax forms have been hampered by increasingly complex tax codes, frequent tax code revisions, and taxpayers' reading ability; (2) the IRS process for developing and revising its tax forms and publications appears reasonable and provides clear lines of responsibility and accountability, specific timeframes, adequate management oversight, sufficient opportunities to evaluate suggestions from internal and external sources, and appropriate strategies for coping with sudden tax law changes; (3) IRS periodically reviews and revises its publications and tax forms so that accurate forms and publications are available to taxpayers for each filing season; (4) IRS considers comments from taxpayers and tax preparers, payroll professionals, accountants, and lawyers regarding clarity improvements; (5) IRS has initiated several special projects to study taxpayer comprehension problems and to further improve its forms and publications; (6) despite its ongoing commitment to improvement, IRS does not have a systematic way to identify the specific areas that cause individual taxpayer confusion; and (7) IRS needs to find ways to readily identify the specific concerns of individual taxpayers.
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Outpatient therapy services--covered under part B of the Medicare program--comprise physical therapy, occupational therapy, and speech- language pathology to improve patients' mobility and functioning. Medicare regulations and coverage rules require that beneficiaries be referred for outpatient therapy services by a physician or nonphysician practitioner and that a written plan of care be reviewed and certified by the providers at least once every 30 days. Beneficiaries receiving therapy are expected to improve significantly in a reasonable time and to need therapy for rehabilitation rather than maintenance. Medicare-covered outpatient therapy services are provided in a variety of settings by institutional providers (such as hospital outpatient departments, skilled nursing facilities, comprehensive outpatient rehabilitation facilities, outpatient rehabilitation facilities, and home health agencies) and by noninstitutional providers (such as physicians, nonphysician practitioners, and physical and occupational therapists in private practice). Both institutional and noninstitutional providers--with the exception of hospital outpatient departments--are subject to the therapy caps. For more than a decade, Medicare's costs for outpatient therapy services have been rising, and widespread examples of inappropriate billing practices, resulting from regulatory ambiguity and weaknesses in Medicare's payment rules, have been reported by us and others. In 1995 we reported, for example, that while state averages for physical, occupational, and speech therapists' salaries in hospitals and skilled nursing facilities ranged from about $12 to $25 per hour, Medicare had been charged $600 per hour or more. HHS's Office of Inspector General reported in 1999 that Medicare reimbursed skilled nursing facilities almost $1 billion for physical and occupational therapy that was claimed improperly, because the therapy was not medically necessary or was provided by staff who did not have the appropriate skills for the patients' medical conditions. To control rising costs and improper payments, Congress established therapy caps for all nonhospital providers in the Balanced Budget Act of 1997. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 later imposed a moratorium on the caps for 2000 and 2001. The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 then extended the moratorium through 2002. Although no moratorium was in effect as of January 1, 2003, CMS delayed enforcing the therapy caps through August 31, 2003. In December 2003, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 placed the most recent moratorium on the caps, extending from December 8, 2003, through December 31, 2005. The legislation establishing the caps provided for two caps per beneficiary: one for occupational therapy and one for physical therapy and speech-language pathology combined. The legislation set the caps at $1,500 each and provided that these limits be indexed by the Medicare Economic Index each year beginning in 2002. When last in place in 2003, the two caps were set at $1,590 each. To process and pay claims and to monitor health care providers' compliance with Medicare program requirements, CMS relies on claims administration contractors, who use a variety of review mechanisms to ensure appropriate payments to providers. A system of automated checks (a process CMS terms "edits") flags potential billing errors and questionable claims. The automated system can, for example, identify procedures that are unlikely to be performed on the same patient on the same day or pairs of procedure codes that should not be billed together because one service inherently includes the other or the services are clinically incompatible. In certain cases, automated checks performed by CMS claims administration contractors may lead to additional claim reviews or to educating providers about Medicare coverage or billing issues. The contractors' clinically trained personnel may perform a medical review, examining the claim along with the patient's medical record, submitted by the physician. Medical review is generally done before a claim is paid, although medical review may also be done after payment to determine if a claim was paid in error and funds may need to be returned to Medicare. The data and research available to date are insufficient to determine whether any particular conditions or diseases may justify a waiver of Medicare's outpatient therapy caps. Medicare claims data are limited in the extent to which they can be used to identify the actual conditions or diseases for which beneficiaries are receiving therapies because the claims often lack specific diagnostic information. In addition, analyses of the claims data show no particular conditions or diseases as more likely than others to be associated with payments exceeding the therapy caps. The data also show that treatment for a single condition or disease, such as stroke, may vary greatly from patient to patient. Finally, available research on the amount and mix of outpatient therapy for people aged 65 and older with specific conditions and diseases also appears insufficient to justify a waiver of the therapy caps for particular conditions or diseases. It is uncertain how many beneficiaries would have medical needs for therapy costing more than the caps and yet be unable to obtain the needed care because they have either insufficient financial resources or no access to a hospital outpatient therapy department. Although Medicare claims data constitute the most comprehensive available information for Medicare beneficiaries who have received outpatient therapy, they do not always capture the clinical diagnosis for which beneficiaries receive therapy. As such, they are insufficient for identifying particular diseases and conditions that should be exempted from the caps. Patients' conditions or diseases are expressed in claims data through diagnosis codes, and the coding system allows providers to use nonspecific diagnosis codes that are unrelated to a specific clinical condition or disease. A CMS-contracted analysis of 2002 Medicare outpatient therapy claims data, for example, found generic codes, such as "other physical therapy," to be among the most often used diagnosis codes on claim forms (see table 1). Moreover, current Medicare guidelines for processing claims permit institutional providers, such as outpatient rehabilitation facilities and skilled nursing facilities, to submit services from all three therapy types on the same claim form, with one principal diagnosis for the claim; a claim seeking payment for occupational therapy and for speech-language pathology might therefore be filed under "other physical therapy." Analysis of 2002 claims data does not show any particular conditions or diseases that are more likely than others to be associated with payments exceeding the therapy caps for physical therapy and speech-language pathology combined or for occupational therapy. Among the top 99 most reported diagnoses for physical therapy and speech-language pathology, the analysis found no particular diagnoses associated with large numbers of beneficiaries for whom payments would have exceeded the combined physical therapy and speech-language pathology cap in 2002 had it been in effect (see fig. 1). A similar pattern existed for occupational therapy. Medicare claims data do not provide information about patients' therapy needs that could be used to justify waiving the therapy caps. Even in those cases where particular conditions or diseases, such as stroke or Alzheimer's disease, are identified in the diagnosis codes, different individuals with the same diagnosis can need different intensities or types of therapy. For example, one patient with a stroke might be able to return home from the hospital a day or two after admission, while another may suffer a severe loss of functioning and require extensive therapy of more than one type. The CMS-contracted analysis of 2002 claims found wide variation in the number of treatment days required to conclude an episode of care for beneficiaries who had the same "diagnosis," such as stroke. For example, the analysis found that while the median number of days per episode of physical therapy for stroke patients was 10, episode length ranged from 1 to 80 days. Similarly wide ranges in treatment length for stroke patients appeared for occupational therapy (1 to 68 days per episode, median 9) and speech-language pathology (1 to 66 days per episode, median 7). Figure 2 shows the range in length of treatment per episode for patients with a diagnosis of acute cerebrovascular disease (stroke) for the three types of therapy. Available research on the efficacy of outpatient therapy for people aged 65 and older with specific conditions and diseases also appears insufficient to justify a waiver of particular conditions or diseases from the therapy caps. Although our literature review found several studies demonstrating the benefits of therapy for seniors and Medicare-eligible patients, this research generally did not define the amount or mix of therapy services needed for Medicare beneficiaries with specific conditions or diseases. One study, for example, examined the benefits of extensive therapy for stroke victims at skilled nursing facilities. The study concluded that high-intensity therapy may have little effect on beneficiaries' length of time spent in the facility when their short-term prognosis is good; beneficiaries with poorer prognoses, however, may benefit substantially from intensive therapy. Further, because of the complexity of patient factors involved, these studies cannot be generalized to all patients with similar diseases or conditions. In addition, MedPAC, the commission that advises Congress on Medicare issues, suggests that research should be undertaken on when and how much physical therapy benefits older patients and that evidence gathered from this research would assist in developing guidelines to determine when therapy is needed. Medicare claims data suggest that payments for more than a half million beneficiaries would have exceeded the caps had they been in place in 2002. It is uncertain, however, how many beneficiaries with payments exceeding the caps would be adversely affected because they have medical needs for care and no means to obtain it through hospital outpatient departments. According to the CMS-contracted analysis of 2002 claims data, Medicare paid an estimated $803 million in outpatient therapy benefits above what would have been permitted had the therapy caps been enforced that year. Payments for about 17 percent of occupational therapy users and 15 percent of physical therapy and speech-language pathology service users would have surpassed the caps in 2002; these beneficiaries numbered more than a half million (see table 2). Although the claims data show that payments for more than a half million beneficiaries would have exceeded the caps in 2002, it is unknown whether beneficiaries would have been adversely affected had the caps been in place. The data do not show the extent to which these beneficiaries were receiving care consistent with Medicare requirements that therapy improve a beneficiary's condition and be reasonable in amount, frequency, and duration. Also, it is not clear to what extent hospital outpatient departments would serve as a "safety valve" for Medicare beneficiaries needing extensive therapy and unable to pay for it on their own. Past work by us and others has noted that the therapy caps were integral to the Balanced Budget Act's spending control strategy and were unlikely to affect the majority of Medicare's outpatient therapy users. We reported that the hospital outpatient department exemption from the cap was a mitigating factor in the mid-1990s, essentially removing the coverage limits for those users who had access to hospital outpatient departments. CMS-contracted analyses of claims data for 2002, however, show that nearly all the Medicare beneficiaries whose payments would have exceeded the caps did not receive outpatient therapy in hospital outpatient departments. Specifically, an estimated 92 percent (469,850 beneficiaries) of those whose payments would have exceeded the combined physical therapy and speech-language pathology cap--and 98 percent (126,488 beneficiaries) of those whose payments would have exceeded the occupational therapy cap--did not receive therapy services in a hospital outpatient department. These proportions, however, might have been different had the caps been in effect in 2002. Provider groups we spoke with were concerned that a sizable number of beneficiaries with legitimate medical needs whose payments would exceed the caps could be harmed. One group told us that a cap on outpatient therapy services would severely limit the opportunity for patients with the greatest need to receive appropriate care, and another group said that therapy caps could hurt beneficiaries with chronic illnesses. According to a third group, payments can quickly exceed the caps for beneficiaries who suffer from serious conditions such as stroke and Parkinson's disease or who have multiple medical conditions. Statutory mandates since 1997 have required HHS to take certain actions toward developing a payment system for outpatient therapy that considers patients' individual needs for care, but the agency has made little progress toward such a system. In particular, HHS has not determined how to standardize and collect information on the health and functioning of patients receiving outpatient therapy services--a key part of developing a system based on patients' actual needs for therapy. To curb spending growth and ensure that outpatient therapy services are appropriately targeted to those beneficiaries who need them, Congress included provisions related to these services in several laws enacted starting in 1997 (see table 3). These provisions required HHS to report to Congress in 2001 on a revised coverage policy for outpatient therapy services that would consider patients' needs. The provisions also required HHS to report to Congress in 2005 on steps toward developing a standard instrument for assessing a patient's need for outpatient therapy services and on a mechanism for applying such an instrument to the payment process. As of October 2005, HHS had not reported its specific recommendations on revising the coverage policy based on patients' needs. HHS had, however, contracted with researchers to conduct several analyses of Medicare claims data as a means of responding to the mandates. HHS's response, implemented through CMS, to the principal legislative provisions addressing outpatient therapy services has been to contract for a series of studies, first by the Urban Institute and then by AdvanceMed (see table 4). In general, these studies have found that information available from Medicare claims data is insufficient to develop an alternative payment system based on patients' therapy needs, and a patient assessment instrument for outpatient therapy services that collected information on functional status and functional outcomes would be needed to develop such a system. They have also found that a needs-based payment system would be key to controlling costs while ensuring patient access to appropriate therapy. As of October 2005, HHS had taken few steps toward developing a patient assessment instrument for assessing beneficiaries' needs for outpatient therapy. Some health care settings, including inpatient rehabilitation facilities, home health agencies, and skilled nursing facilities, do have patient assessment instruments to collect functional status and other information on Medicare beneficiaries. Officials from HHS's Office of the Assistant Secretary for Planning and Evaluation and CMS told us they were collaborating to examine the consistency of definitions and terms used in these settings. They expected to report to Congress by the end of 2005 (in response to the requirement in the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act) on this effort to standardize patient assessment terminology, although they have no plans to include outpatient therapy services in the effort. CMS officials and one of the provider groups we spoke with estimated that the development of a patient assessment instrument for outpatient therapy services would take at least 3 to 5 years. HHS officials said that the complexity of the task and resource constraints precluded them from including outpatient therapy services in their effort to standardize other patient assessment terminology. CMS has, however, funded a demonstration project with a private-sector firm that has developed a patient assessment instrument that collects functional status and functional outcomes for patients who receive outpatient therapy services, primarily physical therapy, in certain facilities. A report from the firm to CMS is expected in summer 2006. Recent assessments of Medicare claims data have shown that the circumstances that initially led to therapy caps--rising Medicare payments for outpatient therapy and a high rate of improper payments--remain. CMS, however, has not implemented its contracted researchers' proposal to strengthen its system of automated checks for denying payment of improper claims. Provider groups we spoke with agreed that Medicare was likely paying for some medically unnecessary therapy services and that improvements could be made to help strengthen the integrity of the payment system. According to recent CMS assessments of Medicare claims data, Medicare payments for outpatient therapy services continue to rise. Over the 4-year period from 1999 through 2002, Medicare spending for outpatient therapy more than doubled, from an estimated $1.5 billion to $3.4 billion, according to the CMS-contracted analysis of 2002 claims data released in 2004. Although outpatient therapy spending for 2003 and 2004 has not been fully estimated, overall Medicare part B expenditures--which include spending on outpatient therapy services--showed rapid growth (15 percent) from 2003 to 2004, according to CMS estimates reported in 2005. CMS attributed this growth to five factors, one of which was increased use of minor procedures such as therapy performed by physicians and physical therapists. Payments for certain therapy services, for example, increased by 24 percent or more from 2003 to 2004. CMS officials told us that many valid reasons may exist for the significant growth in payments for outpatient therapy. For example, they said, some of the increase in therapy services could be due to the growth in recent years of elective services such as knee replacements. CMS has also recently reported that improper payments made for outpatient therapy services have increased substantially in recent years. Specifically, in November 2004, CMS reported that the estimated error rate for claims rose steadily from 10.9 percent in 1998 to 20.4 percent in 2000. CMS reported that most of the errors were due to insufficient documentation to support the services claimed, such as lack of evidence of physician review and certification of treatment plans. In January 2005, CMS reported error rates in a random sample of more than 160,000 fee-for- service claims, which included therapy services, from 2003. The agency found that claims submitted for therapy services were among those with the highest rates of payments made in error because of insufficient documentation or medically unnecessary services. Such services included procedures frequently provided by therapists, such as therapeutic exercise, therapeutic activities, neuromuscular reeducation, electrical stimulation, manual therapy, and physical therapy evaluation. For example, 23.5 percent of claims for therapeutic activities lacked sufficient documentation, resulting in projected improper payments of more than $34 million. Claims for therapeutic exercises had a "medically unnecessary" error rate of 3 percent, with projected improper payments of more than $18 million. Our past work found that CMS needed to do more medical reviews of beneficiaries receiving outpatient therapy services. We reported in 2004, for example, that in Florida, comprehensive outpatient rehabilitation facilities were the most expensive class of providers of outpatient therapy services in the Medicare program in 2002. Per-beneficiary payments for outpatient therapy services to providers in these facilities were two to three times higher than payments to therapy providers in other facilities. We recommended that CMS direct the Florida claims administration contractor to medically review more claims from comprehensive outpatient rehabilitation facilities. CMS's contracted researcher concluded that CMS could improve its claims system by identifying and implementing modifications to the agency's automated claims review system to better target payments to medically appropriate care. In doing their analysis of the 2002 claims, they identified three types of specific edits that they found to be feasible and that would reject claims likely to be improper: Edits to control multiple billings of codes that are meant to be billed only once per patient per visit. The contracted researchers estimated that in 2002, the impact of this type of improper billing amounted to $36.7 million. Edits to control the amount of time that can be billed per patient per visit under a single code, since most conditions do not warrant treatment times exceeding 1 hour. The contracted researchers estimated that in 2002, the impact of this type of improper billing amounted to $24-$100 million, depending on the amount of time per visit billed under a given code. Edits of clinically illogical combinations of therapy procedure codes. In analyzing 2002 Medicare claims data, the contractor found limited system protections to prevent outpatient therapy providers from submitting claims for procedures that are illogical for a given diagnosis. One example, according to the contractor's report, was claiming for manual therapy submitted with a diagnosis of an eye infection. The estimated impact of improper billings based on illogical combinations of diagnosis and procedure codes in 2002 amounted to $16.7 million. CMS officials agreed with the contracted researcher that such edits are worth considering, but the agency had not implemented them as of October 2005. A CMS official told us, however, that CMS is implementing the proposed edits to control multiple billings of codes meant to be billed only once per patient per visit; the agency expects these edits to be in place in early 2006. As of October 2005, CMS was still considering whether to implement the other two types of edits. In addition to the three types of edits identified by the contracted researcher, the researcher proposed routine data analysis of Medicare claims to identify other utilization limits that could be applied to better target Medicare payments. CMS is considering whether and how to implement this type of analysis. Provider groups we spoke with agreed that Medicare was likely paying for some medically unnecessary therapy services and that improved payment edits could help ensure that Medicare did not pay for such services. Nevertheless, representatives from these groups stressed the importance of mechanisms that would allow Medicare to cover payments for beneficiaries who need extensive care. The representatives noted that an exception process, based on a medical review, could help determine the appropriateness of therapy services. Such an exception process could be invoked to review the medical records of beneficiaries whose providers seek permission for coverage of Medicare payments in excess of the caps. CMS officials agreed that an appeal process or waiver from the caps could be a short-term approach to focus resources on needy beneficiaries. They added that possible criteria for waiving the caps could include (1) having multiple conditions; (2) having certain conditions, levels of severity, or multiple conditions suggested by research as having greater need for treatment; (3) having needs for more than one type of service, such as occupational therapy and speech-language pathology; or (4) having prior use of services or multiple episodes in the same year. HHS does not, however, currently have the authority to implement a process, or to conduct a demonstration or pilot project, to provide exceptions to the therapy caps. Medicare payments for outpatient therapy continue to rise rapidly, and 20 percent or more of claims may be improper. To date, however, HHS has made little progress toward a payment system for outpatient therapy services that is based on patients' needs. Furthermore, while CMS is considering ways to reduce improper payments, it has not implemented the contractor's proposals for improving its claims-processing system. HHS has been required for years to take steps toward developing a payment system based on beneficiaries' needs, which would require developing a process for collecting better assessment information. Studies contracted by CMS to respond to requirements under three laws suggest that the department would need to develop a standard patient assessment instrument to define a patient's diagnosis and functional status and thereby determine the patient's medical need for therapy. In response to a statutory requirement to report on the standardization of patient assessment instruments in a variety of settings, HHS and CMS have an effort under way to study and report to Congress on the development of standard terminology that Medicare providers could use to assess patients' diagnosis and functional status. Although this provision requires that outpatient therapy services be included in this effort, HHS and CMS have not done so. Concerns remain that when the current moratorium expires and the caps are reinstated, some beneficiaries who have medical needs for therapy beyond what can be paid for under the caps may not be able to obtain the care they need. Some beneficiaries may not be able to afford to pay for care or may not have access to hospital outpatient departments, which are not subject to the caps. In the absence of patient assessment information, therefore, an interim process, demonstration, or pilot project may be warranted to allow HHS to grant exceptions to the caps. For example, such a project could allow beneficiaries, under circumstances that CMS determines, an exception to the cap on the basis of medical review supported by documentation from providers regarding their patients' needs for extensive therapy. Such a project could also provide CMS with valuable information about the conditions, diseases, and functional status of beneficiaries who have extensive medical needs for therapy. The information gathered through the project could also facilitate development of a standardized patient assessment process or instrument. HHS, however, would need legislative authority to conduct such a project. Although exceptions could increase Medicare payments for outpatient therapy, exceptions could provide one avenue for Medicare coverage above the caps for some beneficiaries who need extensive therapy. Potentially, payment increases due to exceptions could be offset by implementation of the contractor-proposed improvements, such as edits. To provide a mechanism after the moratorium expires whereby certain Medicare beneficiaries could have access to appropriate outpatient therapy services and to obtain better data needed to improve the Medicare outpatient therapy payment policy, including data on the conditions and diseases of beneficiaries who have extensive outpatient therapy needs, Congress should consider giving HHS authority to implement an interim process or demonstration project whereby individual beneficiaries could be granted an exception from the therapy caps. To expedite development of a process for assessing patients' needs for outpatient therapy services and to limit improper payments, we recommend that the Secretary of HHS take the following two actions: ensure that outpatient therapy services are added to the effort already under way to develop standard terminology for existing patient assessment instruments, with a goal of developing a means by which to collect such information for outpatient therapy, and implement improvements to CMS's automated system for identifying outpatient therapy claims that are likely to be improper. We provided a draft of this report to HHS for comment and received a written response from the department (reproduced in app. I). HHS did not comment on the matter for congressional consideration, in which we said that Congress should give HHS authority to implement an interim process or demonstration project whereby individual beneficiaries could be granted an exception from the therapy caps. HHS concurred with our recommendation that it ensure that outpatient therapy services are added to the effort already under way to develop standard terminology for existing patient assessment instruments. The department stated that it is preparing to contract for a 5-month study to develop a policy and payment guidance report as it explores the feasibility of developing a post-acute care patient assessment instrument. In commenting on our recommendation to implement improvements to CMS's automated system for identifying outpatient therapy claims that are likely to be improper, HHS discussed a national edit system to promote correct coding methods and eliminate improper coding. This national edit system has been applied to some therapy-related claims starting in 1996, and HHS plans to apply it more broadly in 2006. While the national edit system is complementary to the edits proposed by CMS's contracted study, CMS can do more by also implementing improvements to its payment system as suggested by the study's specific findings. HHS also indicated that it was exploring other methods for automated evaluation of claims but commented that its claims-processing system cannot always identify an improper claim from the information that is available on claim forms. We agree that the current system cannot always identify an improper claim, given the lack of information on the claim forms about a patient's actual needs for therapy. It was this conclusion that led to our recommendation that HHS include outpatient therapy in its present efforts to improve the collection of patient assessment information. We believe that CMS can make improvements to its current automated system to reduce improper claims, irrespective of its efforts to improve patient assessment information. As we noted in the draft report, CMS's contracted study found certain edits to be feasible using information already provided on claim forms, such as edits of clinically illogical combinations of therapy procedure codes. We are sending copies of this report to the Secretary of Health and Human Services, the Administrator of the Centers for Medicare & Medicaid Services, and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members 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. GAO staff who made major contributions to this report are listed in appendix II. In addition to the contact mentioned above, Katherine Iritani, Assistant Director; Ellen W. Chu; Adrienne Griffin; Lisa A. Lusk; and Jill M. Peterson made key contributions to this report. Medicare: More Specific Criteria Needed to Classify Inpatient Rehabilitation Facilities. GAO-05-366. Washington, D.C.: April 22, 2005. Comprehensive Outpatient Rehabilitation Facilities: High Medicare Payments in Florida Raise Program Integrity Concern. GAO-04-709. Washington, D.C.: August 12, 2004. Medicare: Recent CMS Reforms Address Carrier Scrutiny of Physicians' Claims for Payment. GAO-02-693. Washington, D.C.: May 28, 2002. Medicare: Outpatient Rehabilitation Therapy Caps Are Important Controls but Should Be Adjusted for Patient Need. GAO/HEHS-00-15R. Washington D.C.: October 8, 1999. Medicare: Tighter Rules Needed to Curtail Overcharges for Therapy in Nursing Homes. GAO/HEHS-95-23. Washington D.C.: March 30, 1995.
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For years, Congress has wrestled with rising Medicare costs and improper payments for outpatient therapy services--physical therapy, occupational therapy, and speech-language pathology. In 1997 Congress established per-person spending limits, or "therapy caps," for nonhospital outpatient therapy but, responding to concerns that some beneficiaries need extensive services, has since placed temporary moratoriums on the caps. The current moratorium is set to expire at the end of 2005. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 required GAO to report on whether available information justifies waiving the caps for particular conditions or diseases. As agreed with the committees of jurisdiction, GAO also assessed the status of the Department of Health and Human Services' (HHS) efforts to develop a needs-based payment policy and whether circumstances leading to the caps have changed. Data and research available are, for three reasons, insufficient to identify particular conditions or diseases to justify waiving Medicare's outpatient therapy caps. First, Medicare claims data--the most comprehensive data for beneficiaries whose payments would exceed the caps--often do not capture the clinical diagnosis for which therapy is received. Nor do they show particular conditions or diseases as more likely than others to be associated with payments exceeding the caps. Second, even for diagnoses clearly linked to a condition or disease, such as stroke, the length of treatment for patients with the same diagnosis varies widely. Third, because of the complexity of patient factors involved, most studies do not define the amount or mix of therapy services needed for Medicare beneficiaries with specific conditions or diseases. Provider groups remain concerned about adverse effects on beneficiaries needing extensive therapy if the caps are enforced. HHS does not, however, have the authority to provide exceptions to the therapy caps. Despite several related statutory requirements, HHS has made little progress toward developing a payment system for outpatient therapy that considers individual beneficiaries' needs. In particular, HHS has not determined how to standardize and collect information on the health and functioning of patients receiving outpatient therapy services--a key part of developing a system based on individual needs for therapy. The circumstances that led to the therapy caps remain a concern. Medicare payments for outpatient therapy are still rising significantly, and increases in improper payments for outpatient therapy continue. HHS could reduce improper payments and Medicare costs by improving its system of automated processes for rejecting claims likely to be improper.
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Farmer Mac is a government-sponsored enterprise or GSE that was chartered by Congress in 1987. It is a federally chartered and privately operated corporation that is publicly traded on the New York Stock Exchange. Farmer Mac is also an independent entity within the Farm Credit System or FCS, which is another GSE. As an FCS institution, Farmer Mac is subject to FCA's regulatory authority. FCA, through OSMO, has general regulatory and enforcement authority over Farmer Mac. According to the 1987 Act, Farmer Mac, in extreme circumstances, may borrow up to $1.5 billion from the U.S. Treasury to guarantee timely payment of any guarantee obligations of the corporation. Congress established Farmer Mac with a mission to create a secondary market--a financial market for buying and selling loans, individually or by securitizing them--in agricultural real estate and rural housing loans, and improve the availability of agricultural mortgage credit. When loans are securitized, they are repackaged into a "pool" by a trust in order to be sold to investors in the capital markets to generate liquidity. Generally, to carry out its mission, Farmer Mac purchases mortgages or bonds directly from lenders using cash generated by issuing debt obligations. It also issues standby agreements for eligible loans whereby Farmer Mac is committed to purchase eligible loans from financial institutions at an undetermined future date when a specific event occurs. The intent for these activities is to provide real estate credit to farmers at rates or conditions more favorable than those that would be available in the absence of Farmer Mac. Farmer Mac also securitizes the mortgages it purchases and issues AMBS and guarantees the timely payment of interest and principal on these securities. However, instead of selling the AMBS in the capital markets to generate cash, Farmer Mac holds most of the AMBS that it issues in its retained portfolio. Farmer Mac faces potential losses primarily from four sources: Credit risk, or the possibility of financial loss resulting from default by borrowers on farming assets that have lost value; Liquidity risk, or the chance that Farmer Mac will be unable to meet its obligations as they come due; Interest rate risk, or possible fluctuations in interest rates that negatively impact earnings or the balance sheet; and Operations risk, or the potential that inadequate or failed internal processes, people and systems, or external events will affect financial condition. Although the federal government explicitly does not guarantee Farmer Mac's obligations, it is generally assumed in financial markets that the government will not allow the GSE to default on its debt and AMBS obligations. In fact, during the 1980s the federal government provided financial assistance to both Fannie Mae and the Farm Credit System when they experienced difficulties due to sharply rising interest rates and declining agricultural land values, respectively. Because the markets perceive that there is an implied federal guarantee on Farmer Mac's obligations, Farmer Mac can borrow money at interest rates that are lower than those generally available to comparably creditworthy private corporations and thus can extend credit and other forms of liquidity to financial institutions at favorable rates. The assets associated with Farmer Mac's activities can generally be divided into program assets and nonmission investments. Program assets are agricultural mortgage loans held by Farmer Mac, the guaranteed securities backed by agricultural loans, and loans underlying Farmer Mac's standby agreements. As of December 31, 2003, Farmer Mac's loan and guarantee portfolio and standby agreements totaled about $5.8 billion. Of that total, nearly $3.1 billion was in off-balance sheet standby and similar agreements. Standby agreements represent a potential obligation of Farmer Mac that does not have to be funded until such time as Farmer Mac is required to purchase a loan. As such, these commitments are not on Farmer Mac's balance sheet and are subject to a statutory minimum requirement of 0.75 percent capital instead of 2.75 percent for on-balance sheet assets. Let me point out that whenever Farmer Mac is obligated under a standby agreement to purchase a delinquent loan, it must also increase the capital held against the loan from 0.75 to 2.75 percent, nearly a 270 percent increase. Farmer Mac funds its loan purchases and other activities primarily by issuing debt obligations of various maturities. As of December 31, 2003, Farmer Mac had $2.8 billion of payable notes due within one year and $1.1billion of payable notes due after one year outstanding. At the same time, Farmer Mac held approximately $1.1 billion in nonmission investments. Farmer Mac's net income increased from $4.6 million in 1997 to $27.3 million in 2003, for a total increase of 493 percent. Farmer Mac's two primary revenue sources are (1) interest income earned on its loan portfolio, guaranteed securities, and nonmission investments, and (2) commitment fees earned on standby agreements. In recent years, Farmer Mac's earnings growth has principally been driven by fees generated by its off-balance sheet standby and similar agreements, which grew rapidly from zero in 1998 to $3.1 billion as of December 31, 2003. Farmer Mac's risk levels have increased along with its income. First, increased risk is apparent in the growing number of impaired loans, real estate owned, and write-offs of bad loans, as well as in the rapid growth in its on- and off-balance sheet loans, guarantees, and standby agreements. Impaired loans totaled $69.96 million at December 31, 2003, compared to zero at December 31, 1997. Part of our concern about the increased credit risk involves Farmer Mac's loan loss model, which is based on loans that differ from those held in the corporation's own portfolios and those covered under its standby agreements in terms of geographic distribution and interest rate terms. This lack of comparability and other limitations of the model may affect the reasonableness and accuracy of Farmer Mac's estimated losses from credit risk either upward or downward. A complicating factor is that notwithstanding the quality of the loans underlying standby agreements, which have been performing better than the loans on Farmer Mac's balance sheet, Farmer Mac lacks the historical experience with standby agreements that is needed to accurately estimate the type and amount of loans it may ultimately be obligated to purchase and any associated losses. Farmer Mac also faces potential liquidity risk as a result of these standby and similar agreements, which can create unexpected demands for additional funding. In other words, at a time when either the agricultural sector is severely depressed or interest rates are falling, Farmer Mac could be required to purchase large amounts of impaired or defaulted loans under the agreements, thus subjecting Farmer Mac to increased funding liquidity risks and the potential for reduced earnings. Although our study found that Farmer Mac has maintained sufficient liquidity to support its loan purchase and guarantee activity, Farmer Mac's liquidity may not be adequate to cover its obligations under its standby or similar agreements. We did not have the necessary historical information to project the number of covered loans that Farmer Mac might need to purchase in the future. Thus, we could not determine the extent of the liquidity risk Farmer Mac might face. At the same time, Farmer Mac management did not have the quantitative data it needed to make accurate risk management and other operating decisions. As noted earlier, we made recommendations to Farmer Mac to enhance its risk management practices. We would like to report that Farmer Mac has responded to our recommendations but it is too early for us to assess the actions taken to implement them. Farmer Mac management recently showed us a loan classification system that will be completed in 2005 that is based on Farmer Mac's loan loss experience. Staff are also now documenting the supporting underwriting decisions for loans that Farmer Mac management approved by overriding one or more specific criteria based on the compensating strengths of those loans. Farmer Mac has also adopted a formal contingency funding and liquidity plan but this plan does not address our concerns about providing for liquidity if a large amount of standby and similar agreement loans were put to Farmer Mac unexpectedly. Farmer Mac representatives told us they are also developing a capital adequacy model. In addition, Farmer Mac management said that they are working with an outside consultant to develop a prepayment model to ensure accurate interest rate risk measurements. Now I want to focus on an issue involving Farmer Mac's $1.5 billion line of credit with Treasury that could impact the corporation's long-term financial condition. This issue is significant because it centers around the AMBS in Farmer Mac's retained portfolio, which as we have seen, makes up 35 percent of its total on-balance sheet assets of $4.3 billion and 26% percent of Farmer Mac's total program assets of $5.8 billion--including off-balance sheet loans underlying the standby and other agreements. Treasury has expressed serious questions about whether it is required to purchase Farmer Mac obligations to meet Farmer Mac-guaranteed liabilities on AMBS that Farmer Mac or its affiliates hold. On the other hand, a legal opinion from Farmer Mac's outside counsel states that Treasury would be required to purchase the debt obligations whether the obligations are held by a subsidiary of Farmer Mac or by an unrelated third party. This disagreement could create uncertainty as to whether Treasury would purchase obligations held in Farmer Mac's portfolio in times of economic stress. This uncertainty also relates to statements made by Farmer Mac to investors concerning Treasury's obligation to Farmer Mac, which in turn, could affect Farmer Mac's ability to issue debt at favorable rates. Ultimately, this uncertainty could impact its long-term financial condition. Farmer Mac's subsidiary, Farmer Mac Mortgage Securities Corporation, holds the majority of AMBS that Farmer Mac issued. Farmer Mac's charter (the 1987 Act) gives it the authority to issue obligations to the Secretary of the Treasury to fulfill its guarantee obligations. According to the 1987 Act, the Secretary of the Treasury may purchase Farmer Mac's obligations only if Farmer Mac certifies that (1) its reserves against losses arising out of its guarantee activities have been exhausted and (2) the proceeds of the obligations are needed to fulfill Farmer Mac's obligations under any of its guarantees. In addition, Treasury is required to purchase obligations issued by Farmer Mac in an amount determined by Farmer Mac to be sufficient to meet its guarantee liabilities not later than 10 business days after receipt of the certification. However, Treasury has indicated that the requirement to purchase Farmer Mac obligations may extend only to those obligations issued and sold to outside investors. In a comment letter dated June 13, 1997, and submitted to FCA in connection with a proposed regulation on conservatorship and receivership for Farmer Mac (1997 Treasury letter), Treasury stated "...we have 'serious questions' as to whether the Treasury would be obligated to make advances to Farmer Mac to allow it to perform on its guarantee with respect to securities held in its own portfolio---that is, where the Farmer Mac guarantee essentially runs to Farmer Mac itself." The 1997 Treasury letter indicated that if the purchase of obligations extended to guaranteed securities held by Farmer Mac this would belie the fact that the securities are not backed by the full faith and credit of the United States, since a loan to Farmer Mac to fulfill the guarantee would benefit holders of Farmer Mac's general debt obligations. The 1997 Treasury letter stated "Treasury's obligation extends to Farmer Mac only in the prescribed circumstances, and is not a blanket guarantee protecting Farmer Mac's guaranteed securities holders from loss. Nor is the purpose of the Treasury's obligation to protect Farmer Mac shareholders or general creditors." According to Treasury, the 1997 letter remains its position concerning Farmer Mac's line of credit. Meanwhile, the legal opinion of Farmer Mac's outside counsel is that the guarantee is enforceable whether AMBS are held by a subsidiary of Farmer Mac or by an unrelated third party. Farmer Mac's legal opinion also states that Treasury could not decline to purchase the debt obligations issued by Farmer Mac merely because the proceeds of the obligations are to be used to satisfy Farmer Mac's guarantee with respect to AMBS held by a subsidiary. According to Farmer Mac, if the conditions set forth in the 1987 Act are met--required certification and a limitation on the amount of obligations of $1.5 billion--then there is no exception in the 1997 Act that authorizes Treasury to decline to purchase the obligations. Farmer Mac states that discriminating among Farmer Mac guaranteed securities based on the identity of the holder in determining whether Farmer Mac could fulfill its guarantee obligations would lead to an anomalous situation in the marketplace and thereby hinder the achievement of Congress' mandate to establish a secondary market for agricultural loans. Before I go into whether Farmer Mac's activities have had an impact on the agricultural real estate loan market, I want to point out that the enabling legislation contains only broad statements of the corporation's mission and purpose. The legislation is not specific and does not provide measurable mission-related criteria that would allow for a meaningful assessment of Farmer Mac's progress in meeting its public policy goals. Our attempt to determine the extent to which Farmer Mac had met its public policy mission led us to conclude that although Farmer Mac has increased its mission-related activities since our previous review, the public benefits derived from these activities are not clear. In trying to assess whether Farmer Mac had made long-term credit available to farmers and ranchers at stable interest rates, we found that from 2001 to 2002, its long-term fixed interest rates on Farmer Mac I loans were similar to the rates offered by commercial banks and FCS institutions. We also found that since 1998, Farmer Mac had been operating under a strategy of retaining the loans it purchased and securitized as AMBS in its portfolio. Farmer Mac stated that this strategy would lower funding costs and increase profitability but as a result, the depth and liquidity of the secondary market for AMBS is unknown. In our report, we recommended that Farmer Mac reevaluate this strategy. Recently, Farmer Mac management said that the corporation had reevaluated its strategy for holding AMBS but determined to continue holding them for economic reasons. However, Farmer Mac management also indicated that the corporation was committed to selling newly issued AMBS periodically, when the conditions of the capital markets and the size of loan pool made such transactions efficient. As I mentioned earlier, Farmer Mac has increased its mission-related activities, primarily by developing the standby agreement program. As of December 31, 2003, all of Farmer Mac's standby agreements are with FCS institutions and 3 FCS institutions represented 51 percent of the standby agreement program. While standby agreements provide greater lending capacity for those institutions, they also lower the amount of capital lending institutions are required to hold against their loans. Fig. 2 shows the effect of standby agreements on the total capital required to be held against the underlying loans in the entire FCS. Our concern is that standby and similar agreements reduce the sum of capital required to be held by the Farm Credit System and Farmer Mac. Generally, institutions can help mitigate the risks associated with lower capital by maintaining a relatively large number of participating lenders and a geographically diverse portfolio. However, Farmer Mac's business activities are concentrated among a small number of business partners and its portfolio is concentrated largely in the western United States. Before discussing governance issues at Farmer Mac, I want to describe how Farmer Mac's board of directors is structured in federal law. Farmer Mac's 15-member board of directors includes 5 members elected by Class A stockholders, which include banks, insurance companies, and other financial institutions that do business with Farmer Mac; 5 members elected by Class B stockholders, which are FCS institutions that do business with Farmer Mac; and 5 members appointed by the President of the United States. Farmer Mac also issues nonvoting Class C stock to the general public. Class A and Class B shareholders are concerned with the use of Farmer Mac services, while Class C shareholders are generally investors concerned with maximizing their profits. According to statements made at the time Farmer Mac's enabling legislation was being considered, this structure was intended to protect the interests of both FCS and commercial lenders by providing for equal representation by FCS, commercial lenders, and the public sector. Under this structure, Farmer Mac resembles a cooperative. At the same time, however, it is a publicly traded company, because its Class A and C stock are traded on the NYSE. But unlike most other publicly traded corporations, Farmer Mac is controlled by institutions with which it has a business relationship. For this reason, the board may face difficulties representing the interests of all shareholders. Good corporate governance requires that the incentives and loyalties of the board of directors of publicly traded companies reflect the fact that the directors are to serve the interests of all the shareholders. However, we found that the statutory structure of Farmer Mac's board and the voting structure of its common stock hamper Farmer Mac's ability to have such a focus. Farmer Mac is subject to NYSE listing standards on corporate governance, as well as statutory and regulatory requirements such as the Sarbanes- Oxley Act of 2002. Collectively, these standards and provisions require that a majority of the board be independent and that key committees (audit, nominating or corporate governance, and compensation) consist entirely of independent directors. During our review, the listing standards were being revised and criteria for independence had not been finalized. Based on the proposed standards, our assessment was that business relationships between Farmer Mac and the directors of its board may have prevented these individuals from meeting the standards of independence under NYSE rules. In updating our information for this testimony, we noted that Farmer Mac's 2004 annual proxy statements had identified 2 of 15 directors as not meeting the independence standards. One of the 2 directors is not a nominee for re-election. The other director has decided to withdraw as a member of the corporate governance committee if elected as a director at 2004 annual meeting. We found that Farmer Mac's board nomination process, director training, and management succession planning were not as concise, formal, or well documented as best practices would suggest. We also found that Farmer Mac's stock option vesting program appears generous compared to general industry practices. We made recommendations to Farmer Mac's board to improve the transparency and disclosure of these processes and to reevaluate stock option levels and vesting period. Since our 2003 report, according to Farmer Mac management, the board has reviewed and confirmed that all board members fully understand the nomination process and that it has established a formal executive management succession plan. Further, the board has initiated a formal training program for its members that included external training and briefings on subjects relevant to the operations of Farmer Mac. Finally, the board had extended the vesting period of the corporation's stock options. The final area of our 2003 review involved regulatory oversight of Farmer Mac. We reported that since 2002 FCA had taken several steps to enhance supervisory oversight of Farmer Mac but it faced significant challenges that could limit its regulatory effectiveness. We made several recommendations to FCA designed to enhance the risk-based capital model, improve off-site monitoring of Farmer Mac, and help assess and report how well Farmer Mac is achieving its mission. In updating our information for this testimony, we found that FCA had taken or planned to take a number of actions to further address many of our concerns and recommendations. During our 2003 review, we noted that FCA had begun strengthening its oversight of Farmer Mac by doing a more comprehensive safety and soundness examination and undertaking initiatives to expand its regulatory framework. These initiatives included developing regulations to limit the level and quality of Farmer Mac's nonmission investments and issue specific liquidity standards, and studying the implications of regulatory capital arbitrage between FCS institutions and Farmer Mac. However, we found that FCA continued to face significant challenges in sustaining and improving its oversight and more remained to be done to improve its off-site monitoring, assessment of risk-based capital, and mission oversight. For example, FCA had not been updating and reformatting Farmer Mac's call report schedules and corresponding instructions to fully conform to FCA regulations and to reflect recent accounting changes. We also identified a number of issues related to the data used in and structure of FCA's risk-based capital model, but the overall impact these issues have on the estimate of risk-based capital for Farmer Mac's credit risk is uncertain. Some concerns, such as the potential undercounting of loans which experienced credit losses, or greater prepayment of the loans in the database used to build FCA's credit risk model relative to the kinds of loans that Farmer Mac now purchases, may result in the FCA credit risk model underestimating the credit risk capital requirement. Other issues, such as lacking a variable to track land price changes for any but the year with the most economic stresses, may cause the model to overestimate the credit risk capital requirement. Augmented data and more analysis could better determine the relative magnitudes of these effects. Our study found that FCA's oversight of Farmer Mac had typically focused on safety and soundness and that FCA lacked criteria and procedures to effectively oversee how well Farmer Mac achieves its mission. At the same time, Farmer Mac's enabling legislation is broadly stated and does not include any measurable goals or requirements to assess progress toward meeting its mission. More explicit mission goals or requirements would help FCA in improving its oversight of Farmer Mac. Since our 2003 report, FCA has continued to make a concerted effort to further enhance its oversight of Farmer Mac. First, FCA staff are drafting regulatory revisions to the risk-based capital model that covers a range of issues. They plan to present a proposed rule to the FCA board for consideration in the fall of 2004. According to FCA officials, they are engaged in efforts to address the issues related to the risk-based model raised in our report but there are certain elements of our recommendation they have considered and decided not to adopt, including a "run-off" approach, the effect of yield maintenance penalties, and the use of land value declines as the independent variable in loan loss regression. Second, FCA has made some revisions to the Farmer Mac quarterly call reports, and is in process of making additional revisions. These initial revisions included adjustments to call report schedules that were identified during our 2003 review. FCA has a number of capital-related projects in progress that, taken collectively, may address the issue of capital arbitrage within the Farm Credit System. In addition, FCA has a number of ongoing projects that may address our recommendation related to requiring Farmer Mac to obtain a credit rating. Finally, FCA has begun planning for a project that will consider different approaches for assessing the impact Farmer Mac's activities have on the agricultural real estate lending market. Our 2003 review showed that Farmer Mac's income, mission-related activities and risks have all increased since we last reported in 1999. At the same time, we found that Farmer Mac, FCA, and Congress could each take actions to ensure that Farmer Mac operates in a safe and sound manner while fulfilling its public policy mission. We recommended in our report that Farmer Mac strengthen its risk management and corporate governance practices and reevaluate its strategies to carry out its mission. Our report also recommended that FCA make several enhancements to its oversight tools to more effectively oversee both the safety and soundness and mission of Farmer Mac. Farmer Mac and FCA agreed with several of our report's findings and conclusions. During our recent discussions with Farmer Mac and FCA, both entities demonstrated that they are taking steps to implement many of our recommendations. Finally, our report suggested that Congress consider making legislative changes to ensure that Farmer Mac's public benefits can be measured and FCA has the necessary flexibilities to carry out its oversight responsibilities. Mr. Chairman, this concludes our prepared statement. We would be happy to respond to any questions you or other members of the Committee may have at this time. For information about this testimony, contact Davi D'Agostino, Director, Financial Markets and Community Investment, at (202) 512-8678, or Jeanette Franzel, Director at (202) 512-9471. In addition to the individuals named above, Rachel DeMarcus, Debra Johnson, Austin Kelly, Paul Kinney, Bettye Massenburg, Kimberley McGatlin, John Treanor, and Karen Tremba made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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 is based on GAO's October 2003 report, Farmer Mac: Some Progress Made, but Greater Attention to Risk Management, Mission, and Corporate Governance Is Needed (GAO-04-116). GAO's testimony presents a brief overview of Farmer Mac and discusses issues raised in its 2003 report, including Farmer Mac's risk management practices and line of credit with Treasury, mission related activities, board structure, and oversight, which is provided by the Farm Credit Administration (FCA). Farmer Mac, a government-sponsored enterprise (GSE), was established to provide a secondary market for agricultural real estate and rural housing loans and to increase agricultural mortgage credit. In 2003, GAO reported that several aspects of Farmer Mac's financial risk management practices had not kept pace with its increasing risk profile. First, Farmer Mac had $3.1 billion in off-balance-sheet commitments and other agreements that could obligate it to buy the underlying loans or cover related losses under certain conditions. Farmer Mac and the Farm Credit System institutions that participate in the agreements are required to hold far less capital than is otherwise required. Because Farmer Mac's loan activities are concentrated in a small number of financial institutions and in the West, the risk is not reduced while less capital is required to be held. Under stressful agricultural economic conditions, Farmer Mac could be required to purchase large amounts of impaired or defaulted loans if large amounts of the commitments were exercised. Second, the coverage of Farmer Mac's $1.5 billion line of credit with the U.S. Treasury was controversial, as the entities disagreed on whether the securities it has issued and kept in its portfolio would be eligible. Third, GAO reported that while Farmer Mac had increased its mission-related activities since its 1999 report, their impact on the agricultural real estate market was unclear. The effects were difficult to measure partly because Farmer Mac's statute lacks specific mission goals. For this and other reasons, GAO concluded that the public benefits derived from Farmer Mac's activities are not clear. Finally, for profitability reasons, Farmer Mac had a strategy of holding securities it issued in its portfolio instead of selling them to investors in the capital markets. As a result, the depth and liquidity of the market for Farmer Mac's securities is unknown. Farmer Mac's board structure, set in federal law, may make it difficult to ensure that the board fully represents the interests of all shareholders and meets independence and other requirements. The board structure contains elements of both a cooperative and an investor-owned publicly traded company. For example, two-thirds of the board members do business with Farmer Mac and hold the only voting stock, while the common stock holders have no vote. GAO also identified challenges FCA faced in its oversight of Farmer Mac, including a lack of specific criteria for measuring how well it was achieving its mission. Although FCA had taken steps to improve its safety and soundness oversight, more needs to be done to improve its offsite monitoring and assessment of risk-based capital. Farmer Mac and FCA have efforts underway to address many of GAO's recommendations and it was too early to assess them.
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The 340B Program was created following the enactment of the Medicaid Drug Rebate Program and gives 340B covered entities discounts on outpatient drugs comparable to those made available to state Medicaid agencies. HRSA is responsible for administering and overseeing the 340B Program, which, according to federal internal control standards, includes designing and implementing necessary policies and procedures to enforce agency objectives and assess program risk. These policies and procedures should include internal controls that provide reasonable assurance that an agency has effective and efficient operations, and that program participants are in compliance with applicable laws and regulations. Eligibility for the 340B Program is defined in the PHSA. Entities generally become eligible by receiving certain federal grants or by being one of six hospital types. Eligible grantees include clinics that offer primary and preventive care services, such as Federally Qualified Health Centers, clinics that target specific conditions or diseases that raise public health concerns or are expensive to treat, and state operated AIDS Drug Assistance Programs, which serve as a "payer of last resort" to cover the cost of providing HIV-related medications to certain low-income individuals. Eligible hospitals include certain children's hospitals, free standing cancer hospitals, rural referral centers, sole community hospitals, critical access hospitals, and general acute care hospitals that serve a disproportionate number of low-income patients, referred to as disproportionate share hospitals (DSH). To become a covered entity and participate in the program, eligible entities must register with HRSA and be approved. Hospital eligibility for the 340B Program has more requirements compared to the requirements for federal grantees. Specifically, hospitals must meet certain requirements intended to ensure that they perform a government function to provide care to the medically underserved. First, hospitals generally must meet specified DSH adjustment percentages to qualify. local government, (2) a public or private nonprofit corporation that is formally delegated governmental powers by a unit of state or local government, or (3) a private, nonprofit hospital under contract with a state or local government to provide health care services to low-income individuals who are not eligible for Medicaid or Medicare. Additionally, they must be (1) owned or operated by a state or All drug manufacturers that supply outpatient drugs are eligible to participate in the 340B Program and must participate in order to have their drugs covered by Medicaid. To participate, manufacturers are required to sign a pharmaceutical pricing agreement with HHS in which both parties agree to certain terms and conditions. Critical access hospitals are exempt from this requirement. were allowed to contract with a single outside pharmacy to dispense drugs on their behalf. In 2010, however, HRSA issued guidance allowing all covered entities to contract with multiple outside pharmacies. See Notice Regarding Section 602 of the Veterans Health Care Act of 1992 Patient and Entity Eligibility, 61 Fed. Reg. 55156 (Oct. 24, 1996). In our September 2011 report, we found that HRSA's oversight of the 340B Program was inadequate because it relied primarily on self-policing by program participants and because HRSA's guidance on key program requirements lacked the necessary level of specificity to provide clear We also found that changes in the settings direction for participants.where the 340B Program was used resulted in heightened concerns about HRSA's inadequate oversight. We made four recommendations to address these oversight inadequacies and to ensure appropriate use of the program. In its oversight of the 340B Program, we found in 2011 that HRSA primarily relied on covered entities and manufacturers to police themselves and ensure their own compliance with program requirements. Upon enrollment into the program, HRSA required participants to self- certify that they would comply with applicable 340B Program requirements and any accompanying agency guidance. HRSA also expected participants to develop the procedures necessary to ensure compliance, maintain auditable records that demonstrated compliance, and inform HRSA if violations occurred. For example, covered entities had to develop adequate safeguards to prevent drugs purchased at 340B prices from being diverted to non-eligible patients, such as by using inventory tracking systems that separately processed the purchase and logged the dispensation of 340B drugs. Similarly, manufacturers had to ensure that they properly calculated the 340B price of their drugs. HRSA officials told us that covered entities and manufacturers could also monitor each other's compliance with program requirements, but we found that, in practice, participants could face limitations to doing so. Beyond relying on participants' self-policing, we found that HRSA engaged in few activities to oversee the 340B Program and ensure its integrity, which agency officials said was primarily due to funding constraints. For example, officials told us that they did not require a review of the procedures participants put in place to ensure program compliance. Further, although HRSA had the authority to conduct audits of program participants to determine whether program violations had occurred, at the time of our report, the agency had never conducted an audit. We found that HRSA's guidance on key program requirements lacked the necessary level of specificity to provide clear direction, making it difficult for participants to self-police or monitor others' compliance and raising concerns that the guidance could be interpreted in ways that were inconsistent with its intent. Specifically, we found that HRSA's guidance on the definition of an eligible patient lacked the necessary specificity to clearly define the various situations under which an individual was considered eligible for discounted drugs through the 340B Program. As a result, covered entities could interpret the definition either too broadly or too narrowly. At the time of our report, agency officials told us that they recognized the need to provide additional clarity around the definition of an eligible patient, in part because of concerns that some covered entities may have interpreted the definition too broadly to include non-eligible individuals, such as those seen by providers who were only loosely affiliated with a covered entity. HRSA had not issued guidance specifying the criteria under which hospitals that were not publicly owned or operated could qualify for the 340B Program. For example, one way hospitals can qualify for the program is by executing a contract with a state or local government to provide services to low-income individuals who are not eligible for Medicaid or Medicare. We found that HRSA did not outline any criteria that must be included in such contracts, such as the amount of care a hospital must provide to these low-income individuals, and did not require the hospitals to submit their contracts for review by HRSA. As a result, hospitals with contracts that provided a small amount of care to low-income individuals not eligible for Medicaid or Medicare could claim 340B discounts, which may not have been what the agency intended. HRSA's nondiscrimination guidance was not specific in the practices that manufacturers should follow to ensure that drugs were equitably distributed to covered entities and non-340B providers when distribution was restricted. Some stakeholders we interviewed for the report, such as covered entities, raised concerns about the way certain manufacturers interpreted and complied with the guidance in these cases. In 2011, we also concluded that changes in the settings where the 340B Program was used may have heightened the concerns about the inadequate oversight we identified. In the years leading up to our report, the settings where the 340B Program was used had shifted to more contract pharmacies and hospitals than in the past. We concluded that increased use of the 340B Program by contract pharmacies and hospitals may have resulted in a greater risk of drug diversion to ineligible patients, in part because these facilities were more likely to serve patients that did not meet the definition of a patient of the program. According to HRSA officials, the number of covered entities using contract pharmacies had grown rapidly after it issued its guidance allowing all covered entities to use multiple contract pharmacies; as of July 2011 there were more than 7,000 contract pharmacy arrangements in the program. In addition, based on our own analysis, we found that hospitals' participation in the 340B Program had grown from 591 in 2005 to 1,673 in 2011. Further, although participation in the 340B Program also had increased among other covered entity types, we found that hospitals' participation had grown faster than that of federal grantees. For example, in 2005, hospitals represented 10 percent of program participants, and as of July 2011, they represented 27 percent. To address these oversight inadequacies and to ensure appropriate use of the program, we recommended that the Secretary of HHS instruct the administrator of HRSA to take the following four actions: (1) conduct selective audits of covered entities to deter potential diversion; (2) further specify its nondiscrimination guidance for cases in which distribution of drugs is restricted and require reviews of manufacturers' plans to restrict distribution of drugs at 340B prices; (3) finalize new, more specific guidance on the definition of an eligible patient; and, (4) issue guidance to further specify the criteria that hospitals that are not publicly owned or operated must meet to be eligible for the 340B Program. In fiscal year (FY) 2012, HRSA implemented two of the four recommendations from our 2011 report. Specifically, in response to our recommendation that HRSA conduct selective audits of 340B covered entities to deter potential diversion (that is, diversion of 340B drugs to non-eligible patients), the agency implemented a systematic approach to conducting audits of covered entities that is outlined on its website. The FY 2012 audits included 45 covered entities that were randomly selected and 6 selections targeted based on information from stakeholders, for a total of 51 audits that encompassed more than 410 outpatient facilities and 860 contract pharmacy locations.conducted annual audits of covered entities with plans to continue these annual audits going forward. As a result of the audits already conducted, HRSA has identified instances of non-compliance with program requirements, including violations related to drug diversion. The agency has developed a process to address non-compliance through corrective action plans. The results of each year's audits are available on HRSA's website. Since 2012, HRSA has In response to our recommendation that HRSA further specify its nondiscrimination guidance for cases in which distribution of drugs is restricted and require reviews of manufacturers' plans to restrict distribution of 340B discounted drugs, HRSA issued updated nondiscrimination guidance in May of 2012. This guidance outlined HRSA's policy for manufacturers who intend to restrict distribution of a drug and provided additional detail on the type of information manufacturers should include in their restricted distribution plans. Additionally, HRSA officials told us that they may require manufacturers to submit their restricted distribution plans for review if, after implementation, they receive complaints from covered entities that they are not able to access the drug at the 340B price. HRSA had planned to address our remaining two recommendations in a comprehensive 340B program regulation. Specifically, we had recommended that HRSA (1) finalize new, more specific guidance on the definition of a patient and (2) issue guidance to further specify the criteria that hospitals that are not publicly owned or operated must meet to be eligible for the 340B Program. HRSA had planned to address both of these issues in a comprehensive 340B Program regulation that it submitted to the Office of Management and Budget for review in April 2014. However, HRSA withdrew this proposed comprehensive regulation in November 2014 following a May 2014 federal district court ruling that addressed whether HRSA had statutory authority to issue a regulation After the concerning the ineligibility of certain drugs for 340B pricing.district court ruled that HRSA lacked statutory rulemaking authority under the 340B statute except in three specified areas, HRSA officials reported that they had to assess the impact of the ruling on the proposed comprehensive regulation. The outcome of this assessment is that HRSA plans to issue guidelines to address 340B program areas where it does not have explicit rulemaking authority. HRSA officials said they expect to publish proposed guidelines later this year and that they will address areas such as the definition of a patient and hospital eligibility under the 340B program. Chairman Pitts, Ranking Member Green, and Members of the Committee, this concludes my statement. I would be pleased to respond to any questions you may have. For further information about this statement, please contact Debra A. Draper 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 testimony. Key contributors to this statement were Gerardine Brennan, Assistant Director; Jennie Apter; Kelli Jones; Rachel Svoboda; and Jennifer Whitworth. 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The 340B Drug Pricing Program requires drug manufacturers to sell outpatient drugs at discounted prices to eligible hospitals, clinics, and other entities--commonly referred to as covered entities--in order to have their drugs covered by Medicaid. HRSA, an agency within the Department of Health and Human Services, is responsible for administering and overseeing the 340B Program. In recent years, questions have been raised regarding HRSA's oversight of the program, particularly given growth in the program since its inception in 1992. According to HRSA officials, as of 2015, more than 11,000 covered entities were participating in the 340B Program--an increase of approximately 30 percent since 2008. In September 2011, GAO identified inadequacies in HRSA's oversight of the 340B Program and made recommendations to improve program oversight and ensure appropriate use of the program. This testimony describes (1) inadequacies in 340B Program oversight that GAO previously identified, and (2) progress HRSA has made implementing GAO's recommendations to improve program oversight. This testimony is based largely on GAO's September 2011 report. For this testimony, GAO also obtained information and documentation from HRSA officials about any significant program updates and steps they have taken to implement GAO's 2011 recommendations. In its September 2011 report, GAO found that the Health Resources and Services Administration's (HRSA) oversight of the 340B Program was inadequate to provide reasonable assurance that program participants--covered entities and drug manufacturers--were in compliance with program requirements. Specifically, GAO found the program lacked guidance on key requirements with the level of specificity necessary to provide clear direction, making self-policing difficult, and raising concerns that the guidance could be interpreted in ways that were inconsistent with its intent. In particular, GAO found HRSA's guidance lacked needed specificity on the definition of a patient eligible for drugs discounted under the program, criteria hospitals not publicly owned or operated needed to meet to qualify for the program, and nondiscrimination guidance manufacturers needed to follow to ensure drugs were distributed equitably to both covered entities and non-340B providers. had increasingly been used in settings, such as hospitals, where the risk of diverting 340B drugs to ineligible patients was greater, because these settings were more likely to serve such patients. To address these oversight inadequacies and to ensure appropriate use of the program, GAO recommended HRSA (1) conduct selective audits of covered entities to deter potential diversion; (2) further specify its nondiscrimination guidance for cases in which distribution of drugs is restricted and require reviews of manufacturers' plans to restrict distribution of drugs at 340B prices; (3) finalize new, more specific guidance on the definition of a patient eligible to receive discounted drugs; and (4) issue guidance to further specify the criteria that hospitals not publicly owned or operated must meet to be eligible for the 340B Program. In fiscal year 2012, HRSA implemented two of GAO's four 2011 recommendations. Specifically, the agency implemented a systematic approach to conducting audits of covered entities and issued updated nondiscrimination guidance. With regard to the other two recommendations, HRSA planned to address the definition of a patient and hospital eligibility criteria in a comprehensive 340B Program regulation it submitted to the Office of Management and Budget in April 2014. However, HRSA withdrew this proposal following a May 2014 federal district court ruling addressing HRSA's statutory authority to issue a separate 340B regulation, which found that HRSA's rulemaking authority for the 340B Program is limited to specified areas. HRSA reported that after assessing this ruling, it plans to issue proposed guidelines later this year to address 340B Program areas where it does not have explicit rulemaking authority, including the definition of a patient and hospital eligibility.
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Prior to retiring the program, NASA will need to first return the space shuttle to flight and execute the remaining missions needed to complete assembly of and provide support for the ISS. At the same time, NASA will need to begin the process of closing out or transitioning to other NASA programs the space shuttle's assets, such as its workforce, hardware, and facilities, which are no longer needed to support the program. The process of closing out or transitioning the program's assets will extend well beyond the space shuttle's final flight (see fig. 1). Retiring the space shuttle and, in the larger context, implementing the Vision, will require that the Space Shuttle Program rely on its most important asset--its workforce. The space shuttle workforce consists of approximately 2,000 civil service and 15,600 prime contractor personnel, including a large number of engineers and scientists. In addition to these personnel, there are a large number of critical, lower level subcontractors and suppliers throughout the United States who support the program. The program's workforce is responsible for conducting such things as space shuttle payload processing, mission planning and control, ground operations, and for managing the space shuttle's propulsions systems. While each of the NASA centers support the Space Shuttle Program to some degree, the vast majority of this workforce is located at three of NASA's Space Operations Centers--Johnson Space Center, Kennedy Space Center (KSC), and Marshall Space Flight Center (MSFC) (see fig. 2). The space shuttle workforce and NASA's human capital management has been the subject of many GAO and other reviews in the past. These reviews showed that the space shuttle workforce had suffered from agency downsizing in the mid 1990s and that NASA faced challenges recruiting and training new employees, sufficiently staffing its workforce with qualified workers, and dealing with an aging workforce and signs of overwork and fatigue in its remaining workforce. In the past, NASA officials said that these challenges posed significant flight safety risks for the program. While the Space Shuttle Program had taken some steps to address these issues, sustaining critical skills in many key areas such as subsystems engineering remained a problem. In addition, in 2003 the Columbia Accident Investigation Board noted that years of workforce reductions and outsourcing negatively impacted NASA's experience and systems knowledge base. Further, the Columbia Accident Investigation Board noted that safety and mission assurance personnel were eliminated and careers in safety lost organizational prestige. Additional studies highlighted recent trends affecting the science and engineering labor pool from which employers like NASA draw from. For example, the National Science Board reported in 2004 that worldwide competition for individuals with science and engineering skills was increasing, while the potential pool of individuals with these skills was decreasing. NASA's former Administrator has testified that this situation poses a significant challenge to the agency's ability to maintain a world-class workforce, because it relies on a highly educated and broad science and engineering workforce to accomplish its mission. Over the past few years, GAO and others in the federal government have underscored the importance of human capital management and strategic workforce planning. For example, we designated strategic human capital management as a governmentwide, high-risk area in 2001, 2003, and 2005, and continue to highlight it as a major management challenge specifically for NASA. Strategic Management of Human Capital was also placed at the top of the President's Management Agenda, and the Office of Management and Budget and Office of Personnel Management have made efforts to improve governmentwide human capital management and strategic workforce planning. Recognizing the need for guidance related to strategic human capital management, GAO has issued various reports that outline a strategic human capital approach and provided tools, such as a Model of Strategic Human Capital Management and Human Capital Self Assessment Checklist for Agency Leaders, that agencies can use to aid in addressing this challenge. In response to an increased focus governmentwide on strategic human capital management, NASA has taken several steps to improve its human capital management. These include steps such as devising an agencywide strategic human capital plan, developing workforce analysis tools to assist in identifying critical skills needs, and requesting and receiving additional human capital flexibilities to help the agency compete successfully with the private sector in attracting and retaining employees and to reshape and redeploy its workforce to support its mission. GAO's prior work on strategic human capital management has shown that workforce planning is needed to ensure that the right people with the right skills are in the right place at the right time. Workforce planning addresses two critical needs: (1) aligning an organization's human capital program with its current and emerging mission and programmatic goals and (2) developing long-term strategies for acquiring, developing, and retaining staff to achieve programmatic goals. Although approaches to such planning may vary according to an organization's specific needs and mission, our work suggests that, irrespective of the context in which workforce planning is done, such a process should address five key elements. These include (1) involving top management, employees, and other stakeholders in developing, communicating, and implementing the strategic workforce plan; (2) determining the critical skills and competencies that will be needed to achieve the future programmatic results; (3) developing strategies tailored to address critical skills and competency gaps that need attention; (4) building the capability needed to address administrative, educational, and other requirements important to supporting workforce strategies; and (5) monitoring and evaluating the agency's progress toward its human capital goals and the contribution that human capital results have made toward achieving programmatic goals. The Space Shuttle Program has made limited progress toward developing a detailed long-term strategy for sustaining its workforce through the space shuttle's retirement. While NASA recognizes the importance of having in place a strategy for sustaining a critically skilled workforce to support the space shuttle's operations, it has only taken preliminary steps, such as identifying lessons learned from the retirement of programs comparable to the space shuttle, to do so. Other efforts have been initiated or are planned, such as enlisting the help of human capital experts and revising the acquisition strategy to update the space shuttle's propulsion system prime contracts; however, actions taken thus far have been limited. NASA's prime contractor for space shuttle operations has also taken some preliminary steps, but its ability to progress with these efforts is reliant on NASA making decisions that impact contractor requirements through the remainder of the program. Making progress toward developing a detailed strategy, however, will be important given the potential impact that workforce problems would have on NASA-wide goals. To begin its planning efforts for the space shuttle's retirement, the program identified the lessons learned from the retirement of programs comparable to the space shuttle, such as the Air Force Titan IV Rocket Program, the Navy Base Realignment and Closure activity, and the NASA Industrial Facility closure. Among other things, the lessons learned reports highlight the practices used by other programs when making personnel decisions, such as the importance of developing transition strategies and early retention planning to the success of the space shuttle's retirement. (See app. II for a summary of NASA's reports to date on the lessons learned that are applicable to the retirement of the space shuttle.) Program officials said that this preliminary effort is the first step in an approach they expect to take to plan for retiring the space shuttle. According to these officials, they plan to use the information collected from this preliminary effort to guide in the development of a management plan for retiring the space shuttle. This management plan is expected to include such things as the overall plan, processes, schedule, and roles and responsibilities related to retiring the space shuttle. To inform this management plan, the program expects sometime around mid-2005 to assess its hardware and facility needs through retirement to determine whether to maintain, closeout, or transition assets to other NASA programs--such as space exploration activities. Once these hardware and facility assessments have been completed, the program plans to conduct an assessment of its workforce needs. Officials said that they must understand the program's hardware and facility needs before they can conduct an assessment of its workforce needs through retirement. In addition to the Space Shuttle Program's preliminary work to prepare for sustaining its workforce through retirement, the program has contracted with the National Academy of Public Administration (NAPA) to assist it in planning for the space shuttle's retirement and transitioning to future programs. Specifically, NAPA is to (1) benchmark the best practices of public and private sector organizations that have dealt with workforce issues resulting from the retirement, transition, or elimination of programs comparable to the space shuttle, such as in number of employees affected; (2) assess and review the workforce aspects of the program's retirement strategy throughout the course of its development to ensure that it is addressing the problem adequately; and (3) to the extent possible, assist the program in devising innovative strategies for mitigating the impact of the space shuttle's retirement on the workforce. According to NAPA officials, it has conducted preliminary benchmarking efforts and is awaiting further direction from NASA for its next steps with regard to this task. Although the additional tasks NAPA is to undertake have been identified, it has yet to undertake efforts associated with these tasks. Because NAPA will be reviewing NASA's management plan for retiring the space shuttle as it is developed, the majority of its efforts will not be undertaken until NASA begins to plan more earnestly for sustaining its critically skilled workforce through the program's retirement, which, according to NASA, will likely occur after the space shuttle's return to flight. In addition, because the Space Shuttle Program is heavily reliant on its contractor workforce to support the space shuttle's operations, NASA officials said that they could include provisions in future Space Shuttle Program contracts that require contractors to take steps to prepare for sustaining their workforces through the space shuttle's retirement. However, the program has yet to do so. For example, in September 2004 the Space Shuttle Program exercised the final 2-year option of its Space Flight Operations Contract (SFOC). At this point, NASA did not require that United Space Alliance take any steps to prepare for sustaining its workforce, such as by submitting a critical skills retention plan. A senior NASA official recognized the need for United Space Alliance to devise such a plan, and said that this type of requirement would likely be included as part of the new contract NASA intends to award to United Space Alliance in 2006, once workforce requirements for the remainder of the program have been determined. Separate from the SFOC, the Space Shuttle Propulsion Office at MSFC has begun devising an acquisition strategy for updating its propulsion system prime contracts to take into account the Vision's goal of retiring the space shuttle following completion of the ISS. Although at the time of our review this acquisition strategy was not yet complete, officials said that the updated contracts will likely include a requirement for the contractor to submit a critical skills retention plan. This plan would outline the strategies the contractor plans to implement to sustain the critical skills necessary to support the program through retirement. In addition, officials said that they could take advantage of the award fee provisions available in the space shuttle's propulsion prime contracts to incentivize contractors to put in place strategies for sustaining a critically skilled workforce through retirement and monitor their success in doing so. United Space Alliance has taken preliminary steps to begin to prepare for the space shuttle's retirement and its impact on the company's workforce. For example, the company has begun to define its critical skills needs to continue to support the Space Shuttle Program; has devised a communication plan; contracted with a human capital consulting firm to conduct a comprehensive study of its workforce; and continues to monitor indicators of employee morale and workforce stability. While these efforts are underway, contractor officials said that further efforts to prepare for the space shuttle's retirement and its impact on their workforce are on hold until NASA first makes decisions that impact the space shuttle's remaining flight schedule and thus the time frames for retiring the program and transitioning its assets. Once these decisions have been made and United Space Alliance's contract requirements have been defined, these officials said that they would then be able to proceed with their workforce planning efforts for the space shuttle's retirement, a process that will likely take 6 months to complete. Making progress toward developing a detailed strategy for sustaining a critically skilled space shuttle workforce through the program's retirement will be important given the potential impact that workforce problems could have on NASA-wide goals. According to NASA officials, if the Space Shuttle Program faces difficulties in sustaining the necessary workforce, NASA-wide goals, such as implementing the Vision and proceeding with space exploration activities, could be impacted. For example, workforce problems could lead to a delay in flight certification for the space shuttle, which could potentially result in a delay to the program's overall flight schedule, thus compromising the goal of completing assembly of the ISS by 2010. In addition, officials said that space exploration activities could slip as much as 1 year for each year that the space shuttle's operations are extended because NASA's ability to progress with these activities is reliant on funding and assets that are expected to be transferred from the Space Shuttle Program to other NASA programs. One workforce issue that has already been identified that could impact the program's ability to support space shuttle operations through retirement is an inadequate safety workforce. For example, Safety and Mission Assurance Directorate officials at KSC indicated that they already face difficulties in maintaining a sufficient number of safety personnel to support the Space Shuttle Program. An analysis done by the Safety and Mission Assurance Directorate at KSC shows that it lacks an adequate number of employees to fully perform all of its required functions for the Space Shuttle Program, which increased due to additional safety requirements put in place following the Space Shuttle Columbia accident. Due to this analysis, some additional workforce was added to provide support in this area. Although the Safety and Mission Assurance Directorate now believes that it can meet its inspection schedule, officials said that should the Directorate be unable to complete all of its required inspections, they would deny the space shuttle's certification for flight readiness. This would delay the program's flight schedule. NASA officials told us they expect to face various challenges in sustaining the critically skilled workforce necessary to support the space shuttle's operations through its retirement, including retaining the current workforce, many of whom may want to participate in or will be needed to support future phases of implementing the Vision, and providing a transition path to other programs for the workforce that is needed to support the Space Shuttle Program through retirement. Additional challenges that could affect the program's ability to support space shuttle operations include: Impact on the prime contractor for space shuttle operations. United Space Alliance may not be able to offer a long-term career path to its employees beyond the space shuttle's final flight. This problem results from the company having been established specifically to perform ground and flight operations for the Space Shuttle Program. As such, its future following the space shuttle's retirement remains uncertain. Given this uncertainty, contractor officials stated that they will likely face difficulty recruiting and retaining employees to continue supporting the space shuttle as it nears retirement because of the perceived lack of long-term job security. In addition, they said that the lack of job security may be reflected in poor morale, inattention to details, errors, accidents, absences, and attrition. In addressing problems that may result from this challenge, United Space Alliance has the ability to outplace some employees who work with the Space Shuttle Program to its parent companies. However, contractor officials said that other steps it may have to take to address workforce issues, such as paying retention bonuses, are likely to require funding above normal levels. Governmentwide budgetary constraints. Throughout the process of retiring the space shuttle, NASA, like other federal agencies, will have to contend with urgent challenges facing the federal budget that will put pressure on discretionary spending--such as investments in space programs--and require it to do more with fewer resources. As a result, the Space Shuttle Program's ability to make use of tools that require additional funding--such as certain aspects of NASA's new workforce flexibilities like recruitment or retention bonuses--may be limited. Further, GAO has reported that NASA has had difficulties in accurately estimating the costs of its programs. Given this, the agency may not be able to provide a sound and accurate business case to support the use of such tools. Workforce planning efforts that identify gaps in critical skills based upon expected future needs and support the use of strategies to address these gaps could provide the information needed to support a sound business case. While the Space Shuttle Program is still in the early stages of planning for the program's retirement, its development of a detailed long-term strategy to sustain its future workforce is being hampered by several factors. These include (1) the program's primary near-term focus on returning the space shuttle to flight and (2) uncertainties with respect to implementing the Vision. Space Shuttle Program officials assert that these factors limit the steps they are able to take at this time to plan for the program's future workforce needs. However, our prior work on strategic workforce planning has shown that there are steps that successful organizations take to better position themselves to address future workforce needs, even when faced with uncertainties. Since the Space Shuttle Columbia accident, the program has focused on its near-term goal of returning the space shuttle to flight. While this focus is understandable given the importance of the space shuttle's role in completing assembly of the ISS, it has led to the program delaying efforts to determine future workforce needs. For example, in developing the management plan for retiring the space shuttle, program officials said that the majority of the assessments the program is to complete to support decisions regarding whether to maintain, closeout, or transition the program's assets will not be undertaken until after the space shuttle has returned to flight. According to these officials, one reason for this delay is that personnel needed to conduct the assessments are currently focused on supporting return to flight activities. Because the workforce assessment will not be conducted until after the program determines its hardware and facility requirements, its future workforce needs will likely remain unidentified until well after the space shuttle has returned to flight. While the Vision has provided the Space Shuttle Program with the goal of retiring the space shuttle by 2010 upon completion of the ISS, the program lacks well-defined objectives or goals on which to base its workforce planning efforts. For example, NASA has not yet determined the final configuration of the ISS or the type of vehicle that will replace the space shuttle and be used for space exploration. These decisions are important because they affect the time frames for retiring the space shuttle. Once made, these decisions will also provide important information that officials have said will be used to guide Space Shuttle Program retirement planning efforts, including efforts to determine whether to maintain, closeout, or transition the program's facilities, hardware, and workforce as they are no longer needed to support the program. Lacking this information, officials have said that their ability to progress with detailed long-term workforce planning is limited. Studies by several organizations, including GAO, have shown that successful organizations in both the public and private sectors follow a strategic human capital management approach, even when faced with an uncertain future environment. For example, following a strategic human capital management approach can help an organization to (1) prepare its workforce to meet present and future mission requirements, (2) plan for future human capital needs in an uncertain environment, and (3) address future human capital issues that could jeopardize the accomplishment of goals. As part of this approach, strategic workforce planning begins with establishing a strategic direction and setting goals to guide planning efforts for the organization early on in the planning process. When this is not possible due to an uncertain future environment, scenario planning is one approach that can be used as part of a strategic workforce planning process. Scenario planning is used to describe different future environments that an organization may face and can provide a basis for developing and planning strategies to meet the challenges posed by those scenarios rather than planning to meet the needs of a single view of the future. For example, following the terrorists attacks of September 11, 2001, and during the creation of the Department of Homeland Security, the U.S. Coast Guard undertook scenario planning to guide its short-term operational and human capital planning efforts due to uncertainties. For the Space Shuttle Program, scenario planning could guide workforce planning efforts because it can be undertaken despite uncertainties the program faces and without having definitive requirements for program hardware and facility needs through retirement. Scenario planning could also provide the space shuttle program with flexibility in its workforce planning efforts because it does not rely on information provided by hardware and facility assessments and could be undertaken by NASA personnel not currently focused on returning the space shuttle to flight. The information provided by scenario planning could then be used by program officials to support workforce assessments once decisions about the programs hardware and facility needs have been made. This is one of the most challenging periods in the history of the Space Shuttle Program. Not only must NASA demonstrate that the space shuttle can safely fly again, it must begin the process of retiring its largest program while preparing for the uncertain future of space exploration. The necessity to plan for sustaining a critically skilled space shuttle workforce at this time is critical given the impact that expected workforce problems would have on the program and other larger NASA goals. While the Space Shuttle Program acknowledges that sustaining its critically skilled workforce through the program's retirement is important, the absence of a detailed long-term strategy for doing so makes it unclear how the program will actually accomplish this. By delaying steps to address future workforce needs until other decisions have been made, the program is not taking advantage of valuable time that it could use to better position itself to implement workforce strategies to address expected future challenges and sustain a critically skilled workforce through retirement. Approaches to workforce planning that take in to account uncertainties and provide the program with flexibility in determining future workforce requirements would be particularly relevant to the Space Shuttle Program given the issues that must be resolved before the program can proceed with more detailed workforce planning efforts. To better position the agency to sustain a critically skilled space shuttle workforce through retirement, we recommend that the Acting Administrator direct the Associate Administrator for the Office of Space Operations to implement an approach, as part of its preliminary planning efforts, for identifying the program's future workforce needs that takes into account various future scenarios the program could face. The program should then use this information to develop strategies for meeting the needs of its potential future scenarios. The information collected and strategies devised during scenario planning will then be readily available to be incorporated into the program's detailed workforce planning efforts once any uncertainties have been resolved. In written and oral comments on a draft of this report, NASA indicated that it concurred with our findings, conclusions, and recommendation. NASA reiterated that its primary near-term focus is on safely returning the space shuttle to flight, but stated that the agency is laying the foundation needed to move forward with a comprehensive approach for transitioning the Space Shuttle Program through its Integrated Space Operations Summit process. NASA plans to use this process to provide the agency with an independent view of the respective issues surrounding the mission execution and transition of the Space Shuttle Program and its assets. According to NASA, the information provided by this process will allow the agency to review the risks and opportunities related to a number of alternate scenarios that the Space Shuttle Program might support within the Vision. We are encouraged that NASA is laying the foundation needed for transitioning the Space Shuttle Program. NASA has the opportunity to use the Integrated Space Operations Summit process, specifically the alternate future scenarios for the Space Shuttle Program that it will provide, to proceed with identifying the program's future workforce needs based upon such scenarios. As our recommendation stated, this information could then be readily available to support the program's detailed workforce planning efforts once any uncertainties have been resolved. NASA's comments are reprinted in appendix III. NASA also provided technical comments, which we addressed throughout the report as appropriate. As agreed with your offices, unless you announce its contents earlier, we will not distribute this report further until 30 days from its date. At that time, we will send copies to NASA's Acting Administrator and interested congressional committees. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-4841 or [email protected]. Key contributors to this report are acknowledged in appendix IV. To identify the progress that the National Aeronautics and Space Administration (NASA) and United Space Alliance have made toward developing a strategy for sustaining their critically skilled workforces through the space shuttle's retirement, we: Obtained and analyzed NASA documents and briefing slides related to human capital management, including NASA's Strategic Human Capital Plan and Implementation Plan, NASA center Strategic Human Capital Implementation Plans, NASA's Workforce Plan for Use of the NASA Flexibility Act of 2004 Authorities, policies and procedures for workforce planning, and information on NASA's integrated human capital management tools--such as its Competency Management System, Workforce Integrated Management System, and workforce analysis tools. Obtained and reviewed NASA documents and briefing slides related to the space shuttle's operations and retirement, including reports identifying the "lessons learned" from the Air Force Titan IV Rocket Program, Navy Base Realignment and Closure activity, NASA Industrial Facility closure, and the Boeing A/V-8B and F/A-18 production line transition, and plans and projected schedules for future space shuttle flights and manifests. Interviewed United Space Alliance officials regarding their support of space shuttle operations and involvement with space shuttle retirement planning efforts. We also obtained and analyzed documents related to United Space Alliance's workforce, including demographic data, workforce strategies, and critical skills identification. Reviewed previous GAO reports on NASA, the Space Shuttle Program, and on human capital and workforce planning best practices. We also reviewed human capital reports and guidance from the Office of Personnel Management and the Office of Management and Budget, and interviewed officials from the National Academy of Public Administration regarding human capital management. In addition, we reviewed a report issued by the National Science Board on issues facing the U.S. science and engineering workforce. Interviewed NASA and United Space Alliance officials and received written and oral responses to questions regarding the space shuttle workforce, its demographics, space shuttle operations, and space shuttle retirement planning efforts; NASA operations and management; NASA and United Space Alliance human capital and workforce planning practices; the NASA Flexibility Act of 2004; NASA Safety and Mission Assurance activities; and space shuttle contracts, including the Space Flight Operations Contract. To identify any factors that may have impeded efforts to develop a strategy for sustaining a critically skilled workforce through retirement, we: Interviewed NASA and United Space Alliance officials to obtain an understanding of the challenges they face in planning for the space shuttle's retirement and in addressing workforce issues that may arise as a result of the decision to retire the space shuttle. Obtained and analyzed NASA and United Space Alliance responses to questions that asked for information regarding their goals and strategies for retiring the space shuttle, the processes they expect to follow to achieve these goals, and the tools and strategies they might use to address workforce issues through the space shuttle's retirement. To accomplish our work, we visited and interviewed officials responsible for space shuttle operations at NASA Headquarters, Washington, D.C.; and at three NASA centers designated as Space Operations Centers, including Johnson Space Center (JSC), Texas; Kennedy Space Center (KSC), Florida; and Marshall Space Flight Center (MSFC), Alabama. These centers were chosen because they maintain primary responsibility for conducting space shuttle operations and are the centers at which the vast majority of the space shuttle workforce is located. The offices we met with at each of these centers included Safety and Mission Assurance and Human Resources. Additional information was attained from the Space Shuttle Program Office at JSC; the Space Shuttle Processing Directorate and Space Shuttle Strategic Planning Office at KSC; the Space Shuttle Propulsion Office, Customer and Employees Relations Directorate, and Space Transportation Directorate at MSFC; and the Offices of Space Operations, Exploration Systems, and Procurement at NASA Headquarters. We conducted our review from April 2004 to March 2005 in accordance with generally accepted government auditing standards. To prepare for the space shuttle's retirement, NASA identified the lessons learned from the closeout or retirement of programs comparable to the space shuttle, including the Air Force Titan IV Rocket Program, the Navy Base Realignment and Closure activity, and the NASA Industrial Facility closure. NASA's reports capture lessons learned that might be applicable to the Space Shuttle Program's retirement planning. NASA's highlights from these studies are shown in table 1. In addition to the individual named above, Wesley A. Johnson, Robert Lilly, James Morrison, Shelby S. Oakley, and T.J. Thomson made key contributions to this report.
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The President's vision for space exploration (Vision) directs the National Aeronautics and Space Administration (NASA) to retire the space shuttle following completion of the International Space Station, planned for the end of the decade. The retirement process will last several years and impact thousands of critically skilled NASA civil service and contractor employees that support the program. Key to implementing the Vision is NASA's ability to sustain this workforce to support safe space shuttle operations through retirement. Because of the potential workforce issues that could affect the safety and effectiveness of operations through the space shuttle's retirement, GAO was asked to identify (1) the progress of efforts to develop a strategy for sustaining the space shuttle workforce through retirement and (2) factors that may have impeded these efforts. The Space Shuttle Program has made limited progress toward developing a detailed long-term strategy for sustaining its workforce through the space shuttle's retirement. The program has taken preliminary steps, including identifying the lessons learned from the retirement of programs comparable to the space shuttle, such as the Air Force Titan IV Rocket Program, to assist in its workforce planning efforts. Other efforts have been initiated or are planned, such as enlisting the help of human capital experts and revising the acquisition strategy for updating the space shuttle's propulsion system prime contracts; however, actions taken thus far have been limited. NASA's prime contractor for space shuttle operations has also taken some preliminary steps to begin to prepare for the impact of the space shuttle's retirement on its workforce, such as working with a consulting firm to conduct a comprehensive study of its workforce. However, its ability to progress with these efforts is reliant on NASA making decisions that impact contractor requirements through the remainder of the program. Making progress toward developing a detailed strategy, however, will be important given the potential impact that workforce problems would have on NASA-wide goals. For example, a delay to the space shuttle's schedule due to workforce problems would delay the agency's ability to proceed with space exploration activities. NASA and its prime contractor for space shuttle operations have already indicated that they could face challenges sustaining their critically skilled workforces if a career path beyond the space shuttle's retirement is not apparent. In addition, governmentwide fiscal realities call into question whether funding will be available to support the use of incentives, such as retention bonuses, that could help NASA sustain its space shuttle workforce. Several factors hamper the Space Shuttle Program's ability to develop a detailed long-term strategy to sustain the critically skilled workforce necessary to support safe space shuttle operations through retirement. For example, because of the program's near-term focus on returning the space shuttle to flight, other efforts, such as assessing hardware and facility needs that will ultimately aid the program in determining workforce requirements, are being delayed. In addition, program officials indicated that they are faced with uncertainties regarding the implementation of future aspects of the Vision and lack the requirements needed on which to base their workforce planning efforts. Despite these factors, our prior work on strategic workforce planning has shown that there are steps, such as scenario planning, that successful organizations take to better position themselves to address future workforce needs.
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Each state, and the District of Columbia, imposes an excise tax on the sale of cigarettes, which vary from state to state. As of January 1, 2003, the state excise tax rates for a pack of 20 cigarettes ranged from 2.5 cents in Virginia to $1.51 in Massachusetts (see fig.1). The liability for these taxes generally arises once the cigarettes enter the jurisdiction of the state. Many states have increased their cigarette excise taxes in recent years with the intention of increasing tax revenue and discouraging people from smoking. As a result, many smokers are seeking less costly alternatives for purchasing cigarettes, including buying cigarettes while traveling to a neighboring state with a lower cigarette excise tax. The Internet is an alternative that offers consumers the option and convenience of buying cigarettes from vendors in low-tax states without having to physically travel there. Consumers who use the Internet to buy cigarettes from vendors in other states are liable for their own state's cigarette excise tax and, in some cases, sales and/or use taxes. States can learn of such purchases and the taxes due when vendors comply with the Jenkins Act. Under the act, cigarette vendors who sell and ship cigarettes into another state to anyone other than a licensed distributor must report (1) the name and address of the person(s) to whom cigarette shipments were made, (2) the brands of cigarettes shipped, and (3) the quantities of cigarettes shipped. Reports must be filed with a state's tobacco tax administrator no later than the 10th day of each calendar month covering each and every cigarette shipment made to the state during the previous calendar month. The sellers must also file a statement with the state's tobacco tax administrator listing the seller's name, trade name (if any), and address of all business locations. Failure to comply with the Jenkins Act's reporting requirements is a misdemeanor offense, and violators are to be fined not more than $1,000, or imprisoned not more than 6 months, or both. Although the Jenkins Act, enacted in 1949, clearly predates and did not anticipate cigarette sales on the Internet, vendors' compliance with the act could result in states collecting taxes due on such sales. According to DOJ, the Jenkins Act itself does not forbid Internet sales nor does it impose any taxes. The federal government has had limited involvement with the Jenkins Act concerning Internet cigarette sales. We identified three federal investigations involving such potential violations, and none of these had resulted in prosecution (one investigation was still ongoing at the time of our work). No Internet cigarette vendors had been penalized for violating the act, nor had any penalties been sought for violators. The Attorney General of the United States is responsible for supervising the enforcement of federal criminal laws, including the investigation and prosecution of Jenkins Act violations. The FBI has primary jurisdiction to investigate suspected violations of the Jenkins Act. However, DOJ and FBI officials were unable to identify any investigations of Internet cigarette vendors or other actions taken to enforce the act's provisions regarding Internet cigarette sales. According to DOJ, the FBI could not provide information on actions to investigate Jenkins Act violations, either by itself or in connection with other charges, because the FBI does not have a section or office with responsibility for investigating Jenkins Act violations and does not track such investigations. Also, DOJ said it does not maintain statistical information on resources used to investigate and prosecute Jenkins Act offenses. In describing factors affecting the level and extent of FBI and DOJ enforcement actions with respect to the Jenkins Act and Internet cigarette sales, DOJ noted that the act creates misdemeanor penalties for failures to report information to state authorities, and appropriate referrals for suspected violations must be considered with reference to existing enforcement priorities. Since September 11, 2001, it is understood that the FBI's priorities have changed, as unprecedented levels of FBI resources have been devoted to counterterrorism and intelligence initiatives. ATF, which enforces federal excise tax and criminal laws and regulations related to tobacco products, has ancillary authority to enforce the Jenkins Act. ATF special agents investigate trafficking of contraband tobacco products in violation of federal law and sections of the Internal Revenue Code. For example, ATF enforces the Contraband Cigarette Trafficking Act (CCTA), which makes it unlawful for any person to ship, transport, receive, possess, sell, distribute, or purchase more than 60,000 cigarettes that bear no evidence of state cigarette tax payment in the state in which the cigarettes are found, if such state requires a stamp or other indicia to be placed on cigarette packages to demonstrate payment of taxes (18 U.S.C. 2342). ATF is also responsible for the collection of federal excise taxes on tobacco products and the qualification of applicants for permits to manufacture tobacco products, operate export warehouses, or import tobacco products. ATF inspections verify an applicant's qualification information, check the security of the premise, and ensure tax compliance. To enforce the CCTA, ATF investigates cigarette smuggling across state borders to evade state cigarette taxes, a felony offense. Internet cigarette vendors that violate the CCTA, either directly or by aiding and abetting others, can also be charged with violating the Jenkins Act if they failed to comply with the act's reporting requirements. ATF can refer Jenkins Act matters uncovered while investigating CCTA violations to DOJ or the appropriate U.S. Attorney's Office for charges to be filed. ATF officials identified three investigations since 1997 of Internet vendors for cigarette smuggling in violation of the CCTA and violating the Jenkins Act. In 1997, a special agent in ATF's Anchorage, Alaska, field office noticed an advertisement by a Native American tribe in Washington that sold cigarettes on the Internet. ATF determined from the Alaska Department of Revenue that the vendor was not reporting cigarette sales as required by the Jenkins Act, and its investigation with another ATF office showed that the vendor was shipping cigarettes into Alaska. After ATF discussed potential cigarette smuggling and Jenkins Act violations with the U.S. Attorney's Office for the District of Alaska, it was determined there was no violation of the CCTA. The U.S. Attorney's Office did not want to pursue only a Jenkins Act violation, a misdemeanor offense, and asked ATF to determine whether there was evidence that other felony offenses had been committed. Subsequently, ATF formed a temporary task force with Postal Service inspectors and state of Alaska revenue agents, which demonstrated to the satisfaction of the U.S. Attorney's Office that the Internet cigarette vendor had committed mail fraud. The U.S. Attorney's Office agreed to prosecute the case and sought a grand jury indictment for mail fraud, but not for violating the Jenkins Act. The grand jury denied the indictment. In a letter dated September 1998, the U.S. Attorney's Office requested that the vendor either cease selling cigarettes in Alaska and file the required Jenkins Act reports for previous sales, or come into compliance with the act by filing all past and future Jenkins Act reports. In another letter dated December 1998, the U.S. Attorney's Office instructed the vendor to immediately comply with all requirements of the Jenkins Act. However, an official at the Alaska Department of Revenue told us that the vendor never complied. No further action has been taken. Another investigation, carried out in 1999, involved a Native American tribe selling cigarettes on the Internet directly to consumers and other tribes. The tribe was not paying state tobacco excise taxes or notifying states of cigarette sales to other than wholesalers, as required by the Jenkins Act. ATF referred the case to the state of Arizona, where it was resolved with no criminal charges filed by obtaining the tribe's agreement to comply with Jenkins Act requirements. A third ATF investigation of an Internet vendor for cigarette smuggling and Jenkins Act violations was ongoing at the time of our work. ATF officials said that because ATF does not have primary Jenkins Act jurisdiction, it has not committed resources to investigating violations of the act. However, the officials said strong consideration should be given to transferring primary jurisdiction for investigating Jenkins Act violations from the FBI to ATF. According to ATF, it is responsible for, and has committed resources to, regulating the distribution of tobacco products and investigating trafficking in contraband tobacco products. A change in Jenkins Act jurisdiction would give ATF comprehensive authority at the federal level to assist states in preventing the interstate distribution of cigarettes resulting in lost state cigarette taxes since ATF already has investigative authority over the CCTA, according to the officials. The officials also told us ATF has special agents and inspectors that obtain specialized training in enforcing tax and criminal laws related to tobacco products, and, with primary jurisdiction, ATF would have the investigative authority and would use resources to specifically conduct investigations to enforce the Jenkins Act, which should result in greater enforcement of the act than in the past. Officials in nine states that provided us information all expressed concern about Internet cigarette vendors' noncompliance with the Jenkins Act and the resulting loss of state tax revenues. For example, California officials estimated that the state lost approximately $13 million in tax revenue from May 1999 through September 2001, due to Internet cigarette vendors' noncompliance with the Jenkins Act. Overall, the states' efforts to promote compliance with the act by Internet vendors produced few results. Officials in the nine states said that they lack the legal authority to successfully address this problem on their own. They believe greater federal action is needed, particularly because of their concern that Internet cigarette sales will continue to increase with a growing and substantial negative effect on tax revenues. Starting in 1997, seven of the nine states had made some effort to promote Jenkins Act compliance by Internet cigarette vendors. These efforts involved contacting Internet vendors and U.S. Attorneys' Offices. Two states had not made any such efforts. Six of the seven states tried to promote Jenkins Act compliance by identifying and notifying Internet cigarette vendors that they are required to report the sale of cigarettes shipped into those states. Generally, officials in the six states learned of Internet vendors by searching the Internet, noticing or being told of vendors' advertisements, and by state residents or others notifying them. Five states sent letters to the identified vendors concerning their Jenkins Act reporting responsibilities, and one state made telephone calls to the vendors. After contacting the Internet vendors, the states generally received reports of cigarette sales from a small portion of the vendors notified. The states then contacted the state residents identified in the reports, and they collected taxes from most of the residents contacted. When residents did not respond and pay the taxes due, the states carried out various follow-up efforts, including sending additional notices and bills, assessing penalties and interest, and deducting amounts due from income tax refunds. Generally, the efforts by the six states to promote Jenkins Act compliance were carried out periodically and required few resources. For example, a Massachusetts official said the state notified Internet cigarette vendors on five occasions starting in July 2000, with one employee working a total of about 3 months on the various activities involved in the effort. Table 1 summarizes the six states' efforts to identify and notify Internet cigarette vendors about the Jenkins Act reporting requirements and shows the results that were achieved. There was little response by the Internet vendors notified. Some of the officials told us that they encountered Internet vendors that refused to comply and report cigarette sales after being contacted. For example, several officials noted that Native Americans often refused to report cigarette sales, with some Native American vendors citing their sovereign nation status as exempting them from the Jenkins Act, and others refusing to accept a state's certified notification letters. Also, an attorney for one vendor informed the state of Washington that the vendor would not report sales because the Internet Tax Freedom Act relieved the vendor of Jenkins Act reporting requirements. Apart from the states' efforts to identify and notify Internet cigarette vendors, state officials noted that some Internet vendors voluntarily complied with the Jenkins Act and reported cigarette sales on their own. The states subsequently contacted the residents identified in the reports to collect taxes. For example, a Rhode Island official told us there were three or four Internet vendors that voluntarily reported cigarette sales to the state. On the basis of these reports, Rhode Island notified about 400 residents they must pay state taxes on their cigarette purchases and billed these residents over $76,000 (the Rhode Island official who provided this information did not know the total amount collected). Similarly, Massachusetts billed 21 residents for cigarette taxes and collected $2,150 based on reports of cigarette sales voluntarily sent to the state. Three of the seven states that made an effort to promote Jenkins Act compliance by Internet cigarette vendors contacted U.S. Attorneys and requested assistance. The U.S. Attorneys, however, did not provide the assistance requested. The states' requests and responses by the U.S. Attorneys' Offices are summarized below. In March 2000, Iowa and Wisconsin officials wrote letters to three U.S. Attorneys in their states requesting assistance. The state officials asked the U.S. Attorneys to send letters to Internet vendors the states had identified, informing the vendors of the Jenkins Act and directing them to comply by reporting cigarette sales to the states. The state officials provided a draft letter and offered to handle all aspects of the mailings. The officials noted they were asking the U.S. Attorneys to send the letters over their signatures because the Jenkins Act is a federal law and a statement from a U.S. Attorney would have more impact than from a state official. However, the U.S. Attorneys did not provide the assistance requested. According to Iowa and Wisconsin officials, two U.S. Attorneys' Offices said they were not interested in helping, and one did not respond to the state's request. After contacting the FBI regarding an Internet vendor that refused to report cigarette sales, saying that the Internet Tax Freedom Act relieved the vendor of Jenkins Act reporting requirements, the state of Washington acted on the FBI's recommendation and wrote a letter in April 2001 requesting that the U.S. Attorney initiate an investigation. According to a Washington official, the U.S. Attorney's Office did not pursue this matter and noted that a civil remedy (i.e., lawsuit) should be sought by the state before seeking a criminal action. At the time of our work, the state was planning to seek a civil remedy. In July 2001, the state of Wisconsin wrote a letter referring a potential Jenkins Act violation to the U.S. Attorney for prosecution. According to a Wisconsin official, this case had strong evidence of Jenkins Act noncompliance--there were controlled and supervised purchases made on the Internet of a small number of cartons of cigarettes, and the vendor had not reported the sales to Wisconsin. The U.S. Attorney's Office declined to initiate an investigation, saying that it appeared this issue would be best handled by the state "administratively." The Wisconsin official told us, however, that Wisconsin does not have administrative remedies for Jenkins Act violations, and, in any case, the state cannot reach out across state lines to deal with a vendor in another state. Officials in each of the nine states expressed concern about the impact that Internet cigarette vendors' noncompliance with the Jenkins Act has on state tax revenues. The officials said that Internet cigarette sales will continue to grow in the future and are concerned that a much greater and more substantial impact on tax revenues will result. One state, California, estimated that its lost tax revenue due to noncompliance with the Jenkins Act by Internet cigarette vendors was approximately $13 million from May 1999 through September 2001. Officials in all nine states said that they are limited in what they can accomplish on their own to address this situation and successfully promote Jenkins Act compliance by Internet cigarette vendors. All of the officials pointed out that their states lack the legal authority necessary to enforce the act and penalize the vendors who violate it, particularly with the vendors residing in other states. Officials in three states told us that efforts to promote Jenkins Act compliance are not worthwhile because of such limitations, or are not a priority because of limited resources. Officials in all nine states said that they believe greater federal action is needed to enforce the Jenkins Act and promote compliance by Internet cigarette vendors. Four state officials also said they believe ATF should have primary jurisdiction to enforce the act. One official pointed out that his organization sometimes dealt with ATF on tobacco matters, but has never interacted with the FBI. Officials in the other five states did not express an opinion regarding which federal agency should have primary jurisdiction to enforce the act. Through our Internet search efforts, we identified 147 Web site addresses for Internet cigarette vendors based in the United States and reviewed each website linked to these addresses. Our review of the Web sites found no information suggesting that the vendors comply with the Jenkins Act. Some vendors cited reasons for not complying that we could not substantiate. A few Web sites specifically mentioned the vendors' Jenkins Act reporting responsibilities, but these Web sites also indicated that the vendors do not comply with the act. Some Web sites provided notice to consumers of their potential state tax liability for Internet cigarette purchases. None of the 147 Web sites we reviewed stated that the vendor complies with the Jenkins Act and reports cigarette sales to state tobacco tax administrators. Conversely, as shown in table 2, information posted on 114 (78 percent) of the Web sites indicated the vendors' noncompliance with the act through a variety of statements posted on the sites. Thirty- three Web sites (22 percent) provided no indication about whether or not the vendors comply with the act. Some Internet vendors cited specific reasons on their Web sites for not reporting cigarette sales to state tax authorities as required by the Jenkins Act. Seven of the Web sites reviewed (5 percent) posted statements asserting that customer information is protected from release to anyone, including state authorities, under privacy laws. Seventeen Web sites (12 percent) state that they are not required to report information to state tax authorities and/or are not subject to the Jenkins Act reporting requirements. Fifteen of these 17 sites are Native American, with 7 of the sites specifically indicating that they are exempt from reporting to states either because they are Native American businesses or because of their sovereign nation status. In addition, 35 Native American Web sites (40 percent of all the Native American sites we reviewed) indicate that their tobacco products are available tax-free because they are Native American businesses. To supplement our review of the Web sites, we also attempted to contact representatives of 30 Internet cigarette vendors, and we successfully interviewed representatives of 5. One of the 5 representatives said that the vendor recently started to file Jenkins Act sales reports with one state. However, the other 4 said that they do not comply with the act and provided us with additional arguments for noncompliance. Their arguments included an opinion that the act was not directed at personal use. An additional argument was that the Internet Tax Freedom Act supercedes the obligations laid out in the Jenkins Act. Our review of the applicable statutes indicates that neither the Internet Tax Freedom Act nor any privacy laws exempt Internet cigarette vendors from Jenkins Act compliance. The Jenkins Act has not been amended since minor additions and clarifications were made to its provisions in 1953 and 1955; and neither the Internet Tax Freedom Act nor any privacy laws amended the Jenkins Act's provisions to expressly exempt Internet cigarette vendors from compliance. With regard to the Internet Tax Freedom Act, the temporary ban that the act imposed on certain types of taxes on e-commerce did not include the collection of existing taxes, such as state excise, sales, and use taxes. Additionally, nothing in the Jenkins Act or its legislative history implies that cigarette sales for personal use, or Native American cigarette sales, are exempt. In examining a statute, such as the Jenkins Act, that is silent on its applicability to Native American Indian tribes, courts have consistently applied a three-part analysis. Under this analysis, if the act uses general terms that are broad enough to include tribes, the statute will ordinarily apply unless (1) the law touches "exclusive rights of self- governance in purely intramural matters;" (2) the application of the law to the tribe would abrogate rights guaranteed by Indian treaties; or (3) there is proof by legislative history or some other means that Congress intended the law not to apply to Indians on their reservations. Our review of the case law did not locate any case law applying this analysis to the Jenkins Act. DOJ said that it also could not locate any case law applying the analysis to the Jenkins Act, and DOJ generally concluded that an Indian tribe may be subject to the act's requirements. DOJ noted, however, that considering the lack of case law on this issue, this conclusion is somewhat speculative. ATF has stated that sales or shipments of cigarettes from Native American reservations are not exempt from the requirements of the Jenkins Act. Only 8 (5 percent) of the 147 Web sites we reviewed notified customers that the Jenkins Act requires the vendor to report cigarette sales to state tax authorities, which could result in potential customer tax liability. However, in each of these cases, the Web sites that provided notices of Jenkins Act responsibilities also followed the notice with a statement challenging the applicability of the act and indicating that the vendor does not comply. Twenty-eight Web sites (19 percent) either provided notice of potential customer tax liability for Internet cigarette purchases or recommended that customers contact their state tax authorities to determine if they are liable for taxes on such purchases. Three other sites (2 percent) notified customers that they are responsible for complying with cigarette laws in their state, but did not specifically mention taxes. Of the 147 Web sites we reviewed, 108 (73 percent) did not provide notice of either the vendors' Jenkins Act reporting responsibilities or the customers' responsibilities, including potential tax liability, with regard to their states. Our report concluded that states are hampered in attempting to promote Jenkins Act compliance because they lack authority to enforce the act. In addition, violation of the act is a misdemeanor, and U.S. Attorneys' reluctance to pursue misdemeanor violations could be contributing to limited enforcement. Transferring primary investigative jurisdiction from the FBI to ATF would give ATF comprehensive authority at the federal level to enforce the Jenkins Act and should result in more enforcement. ATF's ability to couple Jenkins Act and CCTA enforcement may increase the likelihood it will detect and investigate violators and that U.S. Attorneys will prosecute them. This could lead to improved reporting of interstate cigarette sales, thereby helping to prevent the loss of state cigarette tax revenues. Transferring primary investigative jurisdiction is also appropriate at this time because of the FBI's new challenges and priorities related to the threat of terrorism and the FBI's increased counterterrorism efforts. To improve the federal government's efforts in enforcing the Jenkins Act and promoting compliance with the act by Internet cigarette vendors, which may lead to increased state tax revenues from cigarette sales, our report suggested that the Congress should consider providing ATF with primary jurisdiction to investigate violations of the Jenkins Act (15 U.S.C. SS375-378). In view of the fact that ATF was recently transferred from the Treasury Department to DOJ, it may now be possible for the Attorney General to administratively transfer primary Jenkins Act enforcement authority from the FBI to ATF without involving the Congress in the matter. We believe that this possibility deserves further investigation on the part of DOJ. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Subcommittee may have at this time. For further information, please call me at (202) 512-8777. Other key contributors to this testimony were Darryl W. Dutton, Ronald G. Viereck, Katherine M. Davis, and Shirley Jones.
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The Jenkins Act requires any person who sells and ships cigarettes across a state line to a buyer, other than a licensed distributor, to report the sale to the buyer's state tobacco tax administrator. The act establishes misdemeanor penalties for violating the act. Compliance with this federal law by cigarette sellers enables states to collect cigarette excise taxes from consumers. However, some state and federal officials are concerned that as Internet cigarette sales continue to grow, particularly as states' cigarette taxes increase, so will the amount of lost state tax revenue due to noncompliance with the Jenkins Act. One research firm estimated that Internet tobacco sales in the United States will exceed $5 billion in 2005 and that the states will lose about $1.4 billion in tax revenue from these sales. Overall, we found that the federal government has had limited involvement with the Jenkins Act concerning Internet cigarette sales. We also noted that states have taken action to promote Jenkins Act compliance by Internet cigarette vendors, but results were limited. We determined that most Internet cigarette vendors do not comply with the Jenkins Act or notify their customers of their responsibilities under the act. Vendors cited the Internet Tax Freedom Act, privacy laws, and other reasons for noncompliance. A number of Native Americans cited sovereign nation status. GAO's review indicated that these claims are not valid and vendors are not exempt from the Jenkins Act. We concluded that states are hampered in attempting to promote Jenkins Act compliance because they lack authority to enforce the act. We suggested that to improve the federal government's efforts in enforcing the Jenkins Act and promoting compliance with the act by Internet cigarette vendors, which may lead to increased state tax revenues from cigarette sales, the Bureau of Alcohol, Tobacco and Firearms (ATF), instead of the Federal Bureau of Investigation (FBI), should be provided with primary jurisdiction to investigate violations of the act. We noted that transferring primary investigative jurisdiction was particularly appropriate because of the FBI's new challenges and priorities related to the threat of terrorism and the FBI's increased counterterrorism efforts.
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GAO's body of work related to prior workforce reductions at DOD and other organizations demonstrates the importance of strategic workforce planning, including a consideration of costs, to help ensure that DOD has a fully capable workforce to carry out its mission. According to GAO's Standards for Internal Control, management should ensure that skill needs are continually assessed and that the organization is able to obtain a workforce that has the required skills that match those necessary to achieve organizational goals. Section 322 of the National Defense Authorization Act for Fiscal Year 1991 directed DOD to establish guidelines for reductions in the number of civilian workers employed by industrial or commercial type activities. The act also directed certain DOD agencies or components to submit 5 year master plans for those workers, providing information on workload, demographics, and employee furloughs and involuntary separations, with the materials submitted to Congress in support of the budget request for fiscal year 1991. Subsequently, in 1992, we reported that DOD intended to undertake a multiyear downsizing effort aimed at reducing the civilian workforce by nearly 229,000 positions, or to 20 percent below its fiscal year 1987 levels. However, in 2000, we reported that DOD's approach to prior force reductions was not oriented toward shaping the makeup of the workforce, resulting in significant imbalances in terms of shape, skills, and retirement eligibility. GAO, Defense Force Management: Expanded Focus in Monitoring Civilian Force Reductions Is Needed, GAO/T-NSIAD-92-19 (Washington, D.C.: March 18, 1992); and Defense Force Management: Challenges Facing DOD as It Continues to Downsize Its Workforce, GAO/NSIAD-93-123 (Washington, D.C.: February 12, 1993). Realignment round and the impacts of Operations Desert Shield and Desert Storm. We concluded that broader assessments were needed to determine the magnitude of civilian workforce reductions and their potential impact on given areas and regions, as well as the impact of hiring constraints on the ability of all DOD civilian organizations to efficiently and effectively accomplish their missions. We also have reported that the approaches DOD has relied on to accomplish past civilian workforce downsizing have sometimes had unintended consequences, such as workforce skills imbalances. For instance, DOD's approach to past civilian downsizing relied primarily on voluntary attrition and retirements and varying freezes on hiring authority to achieve force reductions, as well as the use of existing authorities for early retirements to encourage voluntary separations at activities facing major reductions-in-force. The National Defense Authorization Act for Fiscal Year 1993 authorized a number of transition assistance programs for civilian employees, including financial separation incentives-- "buyouts"--to induce the voluntary separation of civilian employees. DOD credited the use of these separation incentives, early retirement authority, and various job placement opportunities in its avoidance of nearly 200,000 involuntary demotions and separations. The tools available to DOD to manage its civilian downsizing helped mitigate some adverse effects of force reductions. However, DOD's approach to civilian workforce reductions was less oriented toward shaping the makeup of the workforce than was the approach it used to manage its military downsizing and resulted in significant imbalances in terms of shape, skills, and retirement eligibility. We also reported that, while managing force reductions for its uniformed military, DOD followed a policy of trying to achieve and maintain a degree of balance between its accessions and losses in order to "shape" its uniformed forces in terms of rank, years of service, and specialties. In contrast, we did not see as much attention devoted to planning and managing civilian workforce reductions. Moreover, the Acquisition 2005 Task Force's final reportinstance, that this was especially true of the civilian acquisition workforce, which from September 1989 to September 1999 was reduced by almost 47 percent. This rate of reduction substantially exceeded that of the rest of the DOD workforce. Eleven consecutive years of downsizing produced serious imbalances in the skills and experience of the highly talented and specialized civilian acquisition workforce, putting DOD on the verge of a retirement-driven talent drain. Our work on the downsizing conducted by other organizations adds further perspective on some challenges associated with certain strategies and the need to conduct effective planning when downsizing a workforce. of downsizing undertaken by 17 private In 1995, we conducted a review companies, 5 states, and 3 foreign governments, generally selected because they were reputed to have downsized successfully. We reported that a number of factors may constrain organizations' downsizing strategies, such as public sentiment, budget limitations, legislative mandates to maintain certain programs, and personnel laws. Moreover, we found that using attrition as a sole downsizing tool can result in skills imbalances in an organization's workforce because the employees who leave are not necessarily those the organization determined to be excess. Further, we also found that attrition is often not sufficient to reduce employment levels in the short term. In addition, some workforce reduction strategies have been found to slow the hiring, promotion, and transfer process and create skills imbalances. However, we found that one key theme emerged from such downsizing efforts. Specifically, most organizations found that workforce planning had been essential in identifying positions to be eliminated and pinpointing specific employees for potential separation. In organizations where planning did not occur or was not effectively implemented, difficulties arose in the downsizing. For example, we reported that a lack of effective planning for skills retention can lead to a loss of critical staff, and that an organization that simply reduces the number of employees without changing work processes will likely have staffing growth recur eventually. We have also identified the potential cost implications of downsizing in our prior work. In 1995, we reported that the savings realized from government downsizing efforts are difficult to estimate. Payroll savings attributed to workforce reductions would not be the amount of actual savings to the federal government from the personnel reductions because of other costs associated with such efforts--for example, separation incentives-- or, in the case of reductions-in-force, severance pay. In addition, the ultimate savings would depend on what happened to the work previously performed by the eliminated personnel. For example, if some of the work was contracted out to private companies, contract costs should be considered in determining whether net savings resulted from workforce reductions. In 2001, we concluded that, considering the enormous changes that DOD's civilian workforce had undergone and the external pressures and demands faced by the department, taking a strategic approach to human capital would be crucial to organizational results. As I will discuss further, this is no less true today than it was in 2001. I turn now to opportunities we have identified for DOD to enhance its strategic human capital planning. Since the end of the Cold War, the civilian workforce has undergone substantial change, due primarily to downsizing, base realignments and closures, competitive sourcing initiatives, and DOD's changing mission. For example, between fiscal years 1989 and 2002, DOD's civilian workforce shrank from 1,075,437 to 670,166--about a 38 percent reduction. According to the department, as of January 2012, DOD's total civilian workforce had grown to include about 783,000 civilians. As I have noted, the achievement of DOD's mission is dependent in large part on the skills and expertise of its civilian workforce, and today's current and long-term fiscal outlook underscore the importance of a strategic and efficient approach to human capital management. The ability of federal agencies to achieve their missions and carry out their responsibilities depends in large part on whether they can sustain a workforce that possesses the necessary education, knowledge, skills, and competencies. Our work has shown that successful public and private organizations use strategic management approaches to prepare their workforces to meet present and future mission requirements. Preparing a strategic human capital plan encourages agency managers and stakeholders to systematically consider what is to be done, how it will be done, and how to gauge progress and results. While the department has made progress adopting some of these approaches, we remain concerned that some missing key elements of strategic workforce planning will hinder DOD's ability to most effectively and efficiently achieve its mission. As we have reported in the past, federal agencies have used varying approaches to develop and present their strategic workforce plans. To facilitate effective workforce planning, we and the Office of Personnel Management have identified six leading principles such workforce plans should incorporate, including: aligning workforce planning with strategic planning and budget involving managers, employees, and other stakeholders in planning; identifying critical skills and competencies and analyzing workforce gaps; employing workforce strategies to fill the gaps; building the capabilities needed to support workforce strategies through steps to ensure the effective use of human capital flexibilities; and monitoring and evaluating progress toward achieving workforce planning and strategic goals. The application of these principles will vary depending on the particular circumstances the agency faces. For example, an agency that is faced with the need for a long lead time to train employees hired to replace those retiring and an increasing workload may focus its efforts on estimating and managing retirements. Another agency with a future workload that could rise or fall sharply may focus on identifying skills to manage a combined workforce of federal employees and contractors. Over the past few years, Congress has enacted a number of provisions requiring DOD to conduct human capital planning efforts for its overall civilian, senior leader, and acquisition workforces and provided various tools to help manage the department's use of contractors, who augment DOD's total civilian workforce. For example, the National Defense Authorization Act for Fiscal Year 2006 directed DOD to create and periodically update a strategic human capital plan that addressed, among other things, the existing critical skills and competencies of the civilian workforce as well as projected needs, gaps in the existing or projected civilian workforce, and projected workforce trends. Subsequent acts established additional requirements for the human capital plan, including requirements to assess issues related to funding of its civilian workforce. We have closely monitored DOD's efforts to address the aforementioned requirements. In our September 2010 review of DOD's 2009 update to its human capital strategic plan we found that, although DOD had demonstrated some progress in addressing the legislative requirements related to its Civilian Human Capital Strategic Workforce Plan, several key elements continued to be missing from the process--including such elements as competency gap analyses and monitoring of progress. Our work found that DOD's plan addressed the requirement to assess critical skills. Specifically, the overall civilian workforce plan identified 22 mission- critical occupations that, according to the department, represent the results of its assessment of critical skills. According to DOD, mission- critical occupations are those occupations that are key to current and future mission requirements, as well as those that present a challenge regarding recruitment and retention rates and for which succession planning is needed. Examples of mission-critical occupations include (1) contracting, (2) accounting, and (3) information technology management. However, as noted, DOD's plan lacked such key elements as competency gap analysis and monitoring of progress. Our prior work identified competency gap analyses and monitoring progress as two key elements in the strategic workforce planning process. Competency gap analyses enable an agency to develop specific strategies to address workforce needs and monitoring progress demonstrates the contribution of workforce planning to achieving program goals. For example, at the time of our review, because the plan discussed competency gap analyses for only 3 of the 22 mission-critical occupations and did not discuss competency gaps for the other 19 mission-critical occupations, we determined that the requirement was only partially addressed. Moreover, DOD was in the initial stages of assessing competency gaps for its senior leader workforce, but it had not completed the analysis needed to identify gaps. Without including analyses of gaps in critical skills and competencies as part of its strategic workforce planning efforts, DOD and the components may not be able to design and fund the best strategies to fill their talent needs through recruiting and hiring or to make appropriate investments to develop and retain the best possible workforce. Further, DOD leadership may not have information necessary to make informed decisions about future workforce reductions, should further reductions to its workforces become necessary. We currently have ongoing work assessing DOD's 2010 Strategic Workforce Plan, which the department released in March 2012. The results of this review are expected to be released in September 2012. In light of the challenges DOD has faced in its strategic workforce planning, we support the department's participation in efforts being made across the federal government to address governmentwide critical skills gaps. Currently, the Office of Personnel Management and DOD are leading a working group comprised of members of the Chief Human Capital Officers Council tasked with (1) identifying mission-critical occupations and functional groups, (2) developing strategies to address gaps in these occupations and groups, and (3) implementing and monitoring these strategies. Our reviews of DOD's acquisition, information technology, and financial management workforces--which include a number of DOD's identified mission-critical occupations--amplifies some of our overarching observations related to strategic workforce planning. In fiscal year 2011 alone, DOD obligated about $375 billion to acquire goods and services to meet its mission and support its operations in the United States and abroad. As noted, our prior work found that the significant reductions to the acquisition workforce in the 1990s produced serious imbalances in the skills and experience of this highly talented and specialized workforce. The lack of an adequate number of trained acquisition and contract oversight personnel has, at times, contributed to unmet expectations and placed DOD at risk of potentially paying more than necessary. Our February 2011 high-risk report noted that DOD needs to ensure that its acquisition workforce is adequately sized, trained, and equipped to meet department needs. We further reported in November 2011 that the department has focused much-needed attention on rebuilding its acquisition workforce and made some progress in terms of growing the workforce, identifying the skills and competencies it needed, and used such information to help update its training curriculum. While DOD has acknowledged that rebuilding its acquisition workforce is a strategic priority, our most recent review of the Defense Acquisition Workforce Development Fund found that DOD continues to face challenges in strategic workforce planning for its acquisition workforce. Specifically, we found that DOD lacks an overarching strategy to clearly align this fund with its acquisition workforce plan. The department has also not developed outcome-related metrics, such as the extent to which the fund is helping DOD address its workforce skills and competencies gaps. Moreover, we remain concerned that the acquisition workforce continues to face challenges in terms of the age and retirement eligibility of its members. According to the most recent reported data from the Federal Acquisition Institute, as of December 2011, the average age of the acquisition workforce ranged from 47 years to 51.7 years, with at least 36 percent of the workforce becoming eligible to retire over the next 10 years. We have also identified a number of challenges associated with DOD's workforce planning for its financial management and information technology workforces. With regard to the financial management workforce, we reported in July 2011 that DOD's financial management has been on GAO's high-risk list since 1995 and, despite several reform initiatives, remains on the list today. Specifically, we noted that effective financial management in DOD will require a knowledgeable and skilled workforce that includes individuals who are trained and certified in accounting. DOD accounting personnel are responsible for accounting for funds received through congressional appropriations, the sale of goods and services by working capital fund businesses, revenue generated through nonappropriated fund activities, and the sales of military systems and equipment to foreign governments or international organizations. According to DOD's fiscal year 2012 budget request, the Defense Finance and Accounting Service processed approximately 198 million payment-related transactions and disbursed over $578 billion in fiscal year 2010. However, we also reported in July 2011 that DOD's strategic workforce plan lacked a competency gap analysis for its financial management workforce, thus limiting the information DOD has on its needs and gaps in that area and the department's ability to develop an effective financial management recruitment, retention, and investment strategy to address other financial management challenges. With regard to DOD's information technology workforce, we reported2011 that, as threats to federal information technology infrastructure and systems continue to grow in number and sophistication, the ability to secure these infrastructure and systems will depend on the knowledge, skills, and abilities of the federal and contractor workforce that implements and maintains these systems. We noted that DOD's information assurance workforce plan--which addresses information technology--incorporates critical skills, competencies, categories, and specialties of the information assurance workforce, but only partially describes strategies to address gaps in human capital approaches and critical skills competencies. DOD's workforce is comprised of military personnel, civilians, and contractors. DOD has acknowledged, however, that with approximately 30 percent of its workforce eligible to retire by March 31, 2015, and the need to reduce its reliance on contractors to augment the current workforce, it faces a number of significant challenges. Our September 2010 review of DOD's strategic workforce plan found that the department had issued a directive stating that missions should be accomplished using the least costly mix of personnel (military, civilian, and contractors) consistent with military requirements and other needs. However, the department's workforce plan did not provide an assessment of the appropriate mix of military, civilian, and contractor personnel capabilities. accompanying a proposed bill for the More recently, the House Report National Defense Authorization Act for Fiscal Year 2013 directs GAO to assess what measures DOD is taking to appropriately balance its current and future workforce structure against its requirements. Specifically, we plan for our review to include: (1) the process by which DOD identified its civilian workforce requirements, taking into consideration the withdrawal from Iraq and impending withdrawal from Afghanistan; and (2) the analysis done by DOD to identify core or critical functions, including which of those functions would be most appropriately performed by military, civilian, or contractor personnel. Our report is due to the Armed Services Committees of the House and Senate by March 15, 2013. H.R. Rep. No. 112-479, at 196-197 (2012), which accompanies H.R. 4310, 112th Cong. (2012). In conclusion, DOD has a large, diverse federal civilian workforce that is key to maintaining our national security. However, as we have noted, DOD's workforce also includes military and contractor personnel and changes made to one of these groups may impact the others. As such, we are currently assessing the measures the department is taking to appropriately balance its current and future workforce structure and its requirements. Chairman Forbes, Ranking Member Bordallo, this concludes my prepared remarks. I would be happy to respond to any questions that you or other Members of the Subcommittee may have at this time. For future questions about this statement, please contact Brenda S. Farrell, Director, Defense Capabilities and Management, at (202) 512-3604 or [email protected]. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this statement include Margaret Best, Assistant Director; Spencer Tacktill; Jennifer Weber; Erik Wilkins-McKee; Nicole Willems; and John Van Schaik. In addition, Penny Berrier, Mark Bird, Timothy DiNapoli, Gayle Fischer, Steven Lozano, Belva Martin, Carol Petersen, and Rebecca Shea made contributions to this report. Defense Acquisition Workforce: Improved Processes, Guidance, and Planning Needed to Enhance Use of Workforce Funds. GAO-12-747R. Washington, D.C.: June 20, 2012. Defense Acquisitions: Further Actions Needed to Improve Accountability for DOD's Inventory of Contracted Services. GAO-12-357. Washington, D.C.: April 6, 2012. Defense Workforce: DOD Needs to Better Oversee In-sourcing Data and Align In-sourcing Efforts with Strategic Workforce Plans. GAO-12-319. Washington, D.C.: February 9, 2012. Streamlining Government: Key Practices from Select Efficiency Initiatives Should Be Shared Governmentwide. GAO-11-908. Washington, D.C.: September 30, 2011. DOD Financial Management: Numerous Challenges Must Be Addressed to Improve Reliability of Financial Information. GAO-11-835T. Washington, D.C.: July 27, 2011. DOD Civilian Personnel: Competency Gap Analyses and Other Actions Needed to Enhance DOD's Strategic Workforce Plans. GAO-11-827T. Washington, D.C.: July 14, 2011. High Risk Series: An Update. GAO-11-278. Washington, D.C.: February 16, 2011. Human Capital: Further Actions Needed to Enhance DOD's Civilian Strategic Workforce Plan. GAO-10-814R. Washington, D.C.: September 27, 2010. Workforce Planning: Interior, EPA, and the Forest Service Should Strengthen Linkages to Their Strategic Plans and Improve Evaluation. GAO-10-413. Washington, D.C.: March 31, 2010. Human Capital: Opportunities Exist to Build on Recent Progress to Strengthen DOD's Civilian Human Capital Strategic Plan. GAO-09-235. Washington, D.C.: February 10, 2009. High Risk Series: An Update. GAO-07-310. Washington, D.C.: January 31, 2007. Human Capital: Agencies Are Using Buyouts and Early Outs with Increasing Frequency to Help Reshape Their Workforces. GAO-06-324. Washington, D.C.: March 31, 2006. DOD Civilian Personnel: Comprehensive Strategic Workforce Plans Needed. GAO-04-753. Washington, D.C.: June 30, 2004. Human Capital: Major Human Capital Challenges at the Departments of Defense and State. GAO-01-565T. Washington, D.C.: March 29, 2001. High Risk Series: An Update. GAO-01-263. Washington, D.C.: January 1, 2001. Human Capital: Strategic Approach Should Guide DOD Civilian Workforce Management. GAO/T-GGD/NSIAD-00-120. Washington, D.C.: March 9, 2000. Human Capital: A Self Assessment Checklist for Agency Leaders. GAO/GGD-99-179. Washington, D.C.: September 1999. Acquisition Management: Workforce Reductions and Contractor Oversight. GAO/NSIAD-98-127. Washington, D.C.: July 31, 1998. Workforce Reductions: Downsizing Strategies Used in Select Organizations. GAO/GGD-95-54. Washington, D.C.: March 13, 1995. Defense Civilian Downsizing: Challenges Remain Even With Availability of Financial Separation Incentives. GAO/NSIAD-93-194. Washington, D.C.: May 14, 1993. Defense Force Management: Challenges Facing DOD As It Continues to Downsize Its Civilian Workforce. GAO/NSIAD-93-123. Washington, D.C.: February 12, 1993. Defense Force Management: Expanded Focus in Monitoring Civilian Force Reductions Is Needed. GAO/T-NSIAD-92-19. Washington, D.C.: March 18, 1992. Defense Force Management: DOD Management of Civilian Force Reductions. GAO/T-NSIAD-92-10. Washington, D.C.: February 20, 1992. Defense Force Management: Limited Baseline for Monitoring Civilian Force Reductions. GAO/NSIAD-92-42. Washington, D.C.: February 5, 1992. 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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DOD's workforce of 783,000 civilians performs a wide variety of duties, including some traditionally performed by military personnel, such as mission-essential logistics support and maintenance, as well as providing federal civilian experts to Afghanistan and other theaters of operations. With the long-term fiscal challenges facing the nation, reductions to the civilian workforce may be considered to achieve cost savings. Human capital has remained a critical missing link in reforming and modernizing the federal government's management practices, even as legislation and other actions since 1990 have been put in place to address major management areas. In the past, GAO has observed that the federal government has often acted as if people were costs to be cut rather than assets to be valued. DOD previously experienced significant downsizing in the 1990s where it did not focus on reshaping the civilian workforce in a strategic manner. Particularly as decision makers consider proposals to reduce the civilian workforce, it will be critical to DOD's mission for the department to have the right number of federal civilian personnel with the right skills. This testimony discusses DOD's 1) prior experience with civilian workforce downsizing, and 2) current strategic human capital planning efforts. This testimony is based on GAO reviews issued from March 1992 through June 2012. Prior Department of Defense (DOD) civilian workforce downsizing efforts in the 1990s were not oriented toward shaping the makeup of the workforce, resulting in significant imbalances in terms of shape, skills, and retirement eligibility. Specifically, in a series of reviews GAO found that DOD's efforts in the 1990s to reduce its federal civilian workforce to levels below that of 1987 were hampered by incomplete data and lack of a clear strategy for avoiding skill imbalances and other adverse effects of downsizing. For instance, in 1992, GAO found that DOD used incomplete and inconsistent data related to workers, workload, and projected force reductions. Further, the approaches DOD has relied on to accomplish downsizing have sometimes had unintended consequences. The use of voluntary attrition, hiring freezes, and financial separation incentives allowed DOD to mitigate some adverse effects of civilian workforce reductions, but were less oriented toward shaping the makeup of the workforce than was the approach the department used to manage its military downsizing. For DOD, this was especially true of the civilian acquisition workforce. The department, which in 2011 obligated about $375 billion to acquire goods and services, was put on the verge of a retirement-driven talent drain in this workforce after 11 consecutive years of downsizing, according to a DOD report. Finally, GAO has found that the use of strategies such as financial separation incentives makes it difficult to document or estimate the actual cost savings of government downsizing efforts, especially in cases where the work previously performed by the eliminated personnel continues to be required. For example, if the work continues to be required, it may need to be contracted out to private companies and contract costs should be considered in determining whether net savings resulted from workforce reductions. DOD has taken positive steps towards identifying its critical skills, but there are opportunities to enhance the department's current strategic workforce plans. GAO and the Office of Personnel Management have identified leading principles to incorporate into effective workforce plans, such as the need to identify and address critical skills and competencies. DOD has been required to have a civilian strategic workforce plan since 2006. Currently, DOD is required to develop a strategic workforce plan that includes, among other things, an assessment of the skills, competencies and gaps, projected workforce trends, and needed funding of its civilian workforce. GAO has found improvements in DOD's efforts to strategically manage its civilian workforce. For instance, GAO reported in 2010 that DOD's 2009 strategic workforce plan assessed critical skills and identified 22 mission-critical occupations, such as acquisition and financial management. However, DOD's plan only discussed competency gap analyses for 3 of its 22 mission-critical occupations, which GAO has reported is key to enabling an agency to develop specific strategies to address workforce needs. For example, GAO found that DOD had not conducted a competency gap analysis for its financial management workforce, and GAO remains concerned that DOD lacks critical information it needs to effectively plan for its workforce requirements. GAO is currently reviewing DOD's latest strategic workforce plan, which was released in March 2012. The results of this review are expected to be released in September 2012.
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Mr. Chairman and Members of the Subcommittee: We are pleased to have this opportunity to discuss issues related to the proposed legislation entitled "Honesty in Sweepstakes Act of 1998," (S. 2141), which was introduced on June 5, 1998, by Senator Ben Nighthorse Campbell. In my statement, I will provide information on the results of our efforts to determine the extent and nature of problems that consumers may have experienced with various sweepstakes mailings that organizations have used to entice consumers to purchase goods and services. Also, I will provide information on our efforts to obtain similar information related to the mailing of documents that resembled cashier's checks, also known as cashier's check "look-alikes," which are not the negotiable instruments that they appear to be. In addition, I will provide information on initiatives in which various agencies and organizations have participated to address consumers' problems with direct mail marketing practices. We performed our work in response to Senator Campbell's July 1, 1998, request. As Senator Campbell indicated in his remarks that appeared in the June 5, 1998, Congressional Record, the proposed legislation is primarily intended to protect consumers, particularly senior citizens, from deceptive direct mail marketing practices. The provisions of the proposed legislation are generally designed to help ensure that organizations, which may use questionable or deceptive direct mail sales promotions involving sweepstakes or other games of chance and cashier's check look-alikes, be required to be as accurate and honest as possible in such promotions. Specifically, the provisions would require these organizations to ensure that statements are printed in large typeface on the outside of the envelope to clearly indicate that the printed material inside involves a sweepstakes or game of chance and that the consumer has not automatically won. Also, the provisions would require that these organizations include statements at the top on the first page of the printed material inside the envelope that would repeat the statements that were printed on the outside of the envelope; indicate consumers' chances of winning the sweepstakes; and state that no purchase is necessary for consumers to win a prize nor would such purchases enhance their chances of winning. In addition, for mailed cashier's check look-alike documents, the provisions would generally require that in accordance with prescribed Postal Service regulations, a statement be included in large or contrasting typeface on the document to indicate that it is not a check and has no cash value. As Senator Campbell has indicated, consumers would be key stakeholders in helping to ensure that organizations complied with the provisions in the proposed legislation. The role of consumers would be to report their complaints to the Postal Service about any mailed material that appeared not to meet the proposed legislative provisions. Such complaints would provide the Postal Service with information that could be used to appropriately investigate and determine an organization's compliance with the proposed "Honesty in Sweepstakes Act" provisions. If such information indicates that the mailed material is not in compliance, the Postal Service may take action to dispose of the material or return it to the sender. (NCL), which established the National Fraud Information Center (NFIC);and (3) Direct Marketing Association (DMA). We contacted officials at FTC and the Postal Inspection Service and discussed with them the extent to which they may have collected and maintained data that could indicate the extent or scope of consumers' problems with questionable or deceptive mail marketing practices that involved mailed sweepstakes material and cashier's check look-alikes. Also, we discussed with these officials whether we could obtain examples of consumers' complaints about such practices that could indicate the nature or the types of problems that consumers had experienced. In selecting states to contact, we relied in large part on information obtained from FTC officials. These officials generally cited various states that had laws, which included requirements for organizations to follow in using mailed sweepstakes material as marketing techniques; were involved in legal actions concerning mailed sweepstakes material against specific organizations; and had been active in dealing with consumers' complaints about mailed sweepstakes material and working with other agencies and organizations to help educate consumers about questionable or deceptive mail marketing practices. During the course of our work, we also obtained information about initiatives in which various federal and state government agencies and nongovernmental organizations have participated in addressing consumers' problems with questionable or deceptive direct mail marketing practices. At the time we completed our work in mid-August 1998, we had obtained information from officials and representatives in 17 federal, state, and local government agencies and nongovernmental organizations. Because we had a limited amount of time in which to obtain information related to mailed sweepstakes material and cashier's check look-alikes, we did not independently verify the information provided by the 17 agencies and organizations. A list of these agencies and organizations is included in the appendix to this statement. We did our work from July through mid-August 1998, in accordance with generally accepted government auditing standards. Of the 17 agencies and organizations from which we obtained information, we found that comprehensive data on the extent of consumers' problems with mailed sweepstakes material and cashier's check look-alikes were generally not available. We found that in 2 of the 17 agencies and organizations--namely FTC and the Postal Inspection Service--some data were available that could help indicate the nature or types of problems that consumers had experienced with mailed sweepstakes material. However, we were unable to obtain similar data concerning cashier's check look-alikes. According to FTC and Postal Inspection Service officials, consumer complaint data on cashier's check look-alikes were not as readily available as data on mailed sweepstakes material. Various officials and representatives in the remaining 15 agencies and organizations told us that generally they could not provide us with information similar to FTC and the Postal Inspection Service that could indicate the extent or nature of consumers' problems. The reasons they cited were mainly because (1) their agencies and organizations did not believe it was their primary function to collect or maintain such information or (2) their data collection was limited to information that could assist the agencies and organizations in taking action against a specific company that may have misused sweepstakes as a marketing tool. For example, an official in Florida's Office of the Attorney General told us that consumer complaint information was collected and maintained only on American Family Publishers (AFP) because the state of Florida had filed a lawsuit against AFP for allegedly deceiving consumers with mailed sweepstakes material. In attempting to identify the extent of consumers' problems with mailed sweepstakes material and cashier's check look-alikes, we found that comprehensive data that could clearly indicate the extent of the problems, including such information as how frequently such problems might occur, were not available. Various officials and representatives from the 17 federal, state, and local government agencies and nongovernmental organizations from which we obtained information told us that generally, such data were not available for two main reasons--first, consumers oftentimes do not complain or report their problems and second, no centralized database existed that could indicate the full extent of such problems involving those who did not register complaints. Regarding the first main reason for the lack of comprehensive data, officials and representatives told us that consumers often did not report problems because they were too embarrassed or did not realize that they had been victimized. Also, some consumers reportedly feared that if they complained, their chances of future sweepstakes winnings would be diminished. In addition, an AARP representative mentioned that in many instances, elderly consumers may fear losing their financial independence if they reported negative experiences with mailed sweepstakes material. Specifically, elderly consumers may fear that if their family members learned that they had been victimized, the family members might then take steps to prevent future victimization, such as stricter control over bank account activities. In addition, consumers may not file complaints because such complaints can be filed with various organizations, such as FTC, the Postal Inspection Service, NFIC, a local better business bureau, or a consumer protection agency. In many instances, consumers may be uncertain about which organization is the most appropriate one to receive their complaints. Also, in some cases, if consumers try to file complaints, they may be referred to or told to contact other organizations, which may cause consumers to become frustrated and abandon their attempts to file complaints. Concerning the second reason for the lack of comprehensive data, various officials and representatives mentioned that no centralized database existed that could indicate the extent of consumers' reported problems with deceptive mail marketing practices involving mailed sweepstakes material and cashier's check look-alikes. Some of the agencies and organizations from which we obtained information, such as FTC, NFIC, and state attorney general's offices, have collected and maintained some, but not complete, consumer complaint data related to such practices. Consumers can complain to a variety of organizations, but none of these organizations necessarily receives information on complaints filed with other organizations. For example, in large part, FTC receives complaints directly from consumers and from various outside organizations, including NFIC, AARP, and Project Phonebusters. However, FTC does not generally receive consumer complaints from all organizations that may accept such complaints, such as state attorneys general offices and local consumer affairs offices. An FTC official mentioned that currently FTC is working with other organizations, such as the National Association of Attorneys General (NAAG), to encourage these organizations to share consumer complaint information with FTC, so that more comprehensive data on consumer complaints can be centrally collected and maintained. Also, although the Postal Inspection Service receives numerous complaints related to consumers' problems with alleged fraudulent activities, including mailed sweepstakes material, it does not necessarily receive these complaints from all organizations that accept them. In addition, according to Postal Service Inspection officials, the extent to which complaints within the Postal Inspection Service's database involve mailed sweepstakes material or cashier's check look-alikes is not easily determined. Furthermore, some of the agencies and organizations from which we obtained information did not have comprehensive data because they generally believed that collecting and maintaining such data were not their primary functions. Also, an AARP representative told us that the general lack of comprehensive data was partially due to an overall scarcity of resources, including staff and funds, which she believed would be needed to collect and maintain a comprehensive, centralized database. In our discussions with various officials and representatives of the agencies and organizations from which we obtained information, they suggested that in order to obtain examples of such problems, in all likelihood, FTC would be the most appropriate agency to provide us with data on consumers' complaints about sweepstakes mailings and cashier's check look-alikes. FTC officials explained that the Consumer Information System (CIS) is FTC's database that includes consumer complaint information. The officials told us that the purpose of CIS, which became fully operational in September 1997, was to collect and maintain various data related to consumers' complaints. FTC officials expected that CIS data would be used primarily by law enforcement organizations and officials to assist them in fulfilling their law enforcement duties. The CIS database contained a total of about 200 categories within which consumers' complaints were included. The categories in CIS covered a wide range of topics such as (1) creditor debt collection, (2) home repair, (3) investments, (4) health care, and (5) leases for various products and services such as automobiles and furniture. We identified one of those categories--prizes/sweepstakes/gifts--as the key category that could provide us information on consumers' complaints about mailed sweepstakes material. However, we were unable to identify a specific category that could help us obtain similar information on cashier's check look-alike documents. FTC officials told us that consumer complaints about such documents could be included in many of the CIS categories because these types of documents may be related to a wide range of products and services, including home mortgage loans, automobiles, and real estate sales. Thus, we would have needed to review nearly all the CIS categories to try to obtain insight into the nature of consumers' problems with these documents. Because our time to review this information was limited, we determined that we should focus our efforts on reviewing those complaints that were included in the prizes/sweepstakes/gifts CIS category. by mail had been filed with either FTC or NFIC. Also, they mentioned that many of the 15,735 records in the prizes/sweepstakes/gifts category included consumer complaints that both FTC and NFIC had maintained in their databases for several years before CIS was established. In reviewing the consumer complaint data we received from FTC, we focused on those complaints that were included in CIS during the most recent 12-month period (i.e., July 1, 1997, through June 30, 1998). For this period, we identified 1,394 consumer complaints within the prizes/sweepstakes/gifts CIS category in which the initial contact with the consumer was made by mail. Of the 1,394 complaints, we found that in 1,215, or about 87 percent, of these complaints, companies had requested individual consumers to remit money. The total amount of money requested by the companies was reported to be about $102,000. Also, our review of the 1,394 consumer complaints showed that 734, or about 53 percent, of consumers reported that they had remitted money to the companies. The total amount of money these consumers said they had paid was about $46,000. The amounts of money individual consumers said that they had paid ranged from less than $5 to $8,850. Of the 734 complaints, 551 individual consumers, or about 75 percent, reported that they had paid amounts less than $5, whereas, in one case, a consumer reported paying $8,850. We did not independently verify the accuracy of this information. In reviewing the 1,394 complaints, we identified 1,371 that included information in the "comment" data field, which indicated the nature of consumers' complaints. From the 1,371 complaints, we randomly selected 200 for analysis to try to more clearly determine the nature of consumers' complaints that were included in the prizes/sweepstakes/gifts CIS category. We sorted the 200 complaints into the following five groups: Sweepstakes that required consumers to send in money or pay fees. Sweepstakes that required consumers to purchase products or services. Sweepstakes that required consumers to call a telephone number for which they were charged a fee. Sweepstakes that required consumers to provide personal information, such as social security numbers or bank account numbers. A miscellaneous group for those complaints that could not readily be included in the previous four groups. Table 1 shows the general breakdown of the 200 consumer complaints into the five groups. As indicated in table 1, 160, or 80 percent, of the consumer complaints we sampled involved sending in money or fees or purchasing products or services. Some examples of the types of complaints included in the two categories were as follows: A consumer was told by a company that she had won $12,000, but that she was required to send in a processing fee to claim her winnings. She remitted the fee to the company but received no winnings. Later, she received an identical notice from the same company but she did not remit the requested processing fee. A consumer received repeated notices that she had won a cash prize in a company's sweepstakes. However, she never received such a prize, even after she ordered and received several plants from the company. A consumer reported that a company had offered to enter his name in its sweepstakes when he purchased magazines. After the consumer purchased the magazines, the company advised him that he was a sweepstakes winner. The company told the consumer to remain at home on a specific date so that he could receive his prize, which was a suitcase full of money. Although the consumer remained at home on the specified date, no suitcase arrived. winnings or verify their winning numbers. Examples of such complaints included the following: A consumer complained that he had received an award notification in the mail. He was required to call a 900 telephone number to verify his winning number. The company told the consumer that he had won one dollar. Later, the consumer was charged $56 for the telephone call. A consumer was told by a company that she had won either a car or cash and required her to either call a 900 telephone number or send in a card to receive her prize. Although she sent in the card, she did not receive her promised prize. As indicated in table 1, 7 consumer complaints from our sample involved organizations requesting personal information, such as the consumer's social security number or bank account number. Some examples of these types of complaints included the following: A consumer reported that a company informed him that he could win as much as $100,000 if he would send in a release form that included bank account information. The consumer did not send in the form. A consumer complained that a company instructed him to call immediately concerning his sweepstakes winnings. When he called, a company representative tried to solicit his telephone number as well as credit card information. The consumer refused to provide the information. As shown in table 1, 26 complaints contained a variety of miscellaneous consumer complaints that did not easily fit into one of the previous four groups. Examples of these miscellaneous complaints included the following: A consumer received three letters informing him that he was the winner of a large sum of money. After writing many letters to the company, the consumer never received any explanation as to why he had not received his money. A consumer reported that he had received a notice that he was the winner in a company sweepstakes. The notice stated that the company was preparing to award him a prize. The consumer sent the company a letter requesting the prize, but subsequently, the company notified the consumer that he in fact was not the winner. Postal Inspection Service officials told us that the Fraud Complaint System (FCS) is used by the Postal Inspection Service to collect and maintain consumer complaint information about various types of alleged fraudulent activities, including those involving deceptive mail marketing practices. The officials estimated that the Postal Inspection Service generally receives between 60,000 and 100,000 consumer complaints each year that pertain to alleged fraudulent activities. However, officials were unable to estimate how many of these complaints were related to mailed sweepstakes material and cashier's check look-alikes. The officials told us that generally, it would be difficult to identify such complaints because FCS has limited search capabilities. In large part, complaints regarding mailed sweepstakes material and cashier's check look-alikes in FCS can only be identified by searching on the company name or product sold. According to Postal Inspection Service officials, we could best obtain information on the nature of consumers' complaints by reviewing specific cases for which postal inspectors had performed investigations. One of the officials told us that during the period October 1, 1997, through August 21, 1998, 16 cases involving mailed sweepstakes material were closed and specific law enforcement actions, such as the issuance of cease and desist orders, had been taken. The 16 cases most often involved sweepstakes and cash prize promotions for which up-front taxes or insurance, judging, or handling fees were required before consumers could participate in the sweepstakes. the consumers' names with the federal government for which the consumers would have to pay a fee. The two combined cases resulted in the issuance of a cease and desist order, a withholding mail order, and a false representation order. We identified various initiatives by specific agencies and organizations that were intended to provide opportunities for these entities to address, among other things, the problems affecting consumers that involved questionable or deceptive mail marketing practices. These initiatives also provided the agencies and organizations with information that they could use to assist law enforcement organizations in initiating appropriate actions, such as investigations and lawsuits. In addition, the initiatives provided agencies and organizations with opportunities to work together on efforts that could help educate and inform consumers about direct mail marketing practices that could cause problems. Examples of two of the more recent initiatives included (1) Project Mailbox and (2) the establishment of a multi-state sweepstakes committee, which resulted from a legal complaint involving AFP. the establishment of a strike force involving FTC, the Postal Inspection Service, various state Attorneys General, NAAG, and AARP that would collect and review direct mail for future law enforcement actions; the initiation of AARP's "Project Senior Sting," a project established in Massachusetts and Arizona in which unsolicited mail would be turned over to law enforcement agencies to search for possible examples of fraud; and the launching of a consumer education campaign involving the Postal Inspection Service, AARP, and the Yellow Pages Publishers Association that is intended to help consumers and small businesses spot mail fraud. Within NAAG, various committees work on a wide range of issues including civil rights, environment, energy, health care, bankruptcy, and taxes. These committees are responsible for studying such issues and recommending policy positions to NAAG members for action. In July 1998, NAAG approved a resolution to establish within its Consumer Protection Committee a subcommittee that plans to address matters related to sweepstakes and prize promotions. According to the resolution, some of the subcommittee's objectives include (1) ensuring active enforcement of current laws that prohibit unfair and deceptive practices by operators of sweepstakes and prize promotions, (2) determining whether specific legislative initiatives would be effective in deterring and punishing deceptive and abusive practices by operators of sweepstakes and prize promotions, and (3) when appropriate, drafting documents that could be developed into state legislation. required consumers who wanted to enter the sweepstakes without purchasing magazines to follow a more circuitous and cumbersome procedure than those who purchased magazines. According to various states, as part of the settlement, which was reached in March 1998, AFP agreed to pay a total of approximately $1.25 million to about 30 states and the District of Columbia. AFP also agreed to revise future mailed sweepstakes material so that it would only tell consumers that they were winners if they had in fact won, only tell consumers that they were among a select group that has a chance of winning a prize if the odds of winning are disclosed, tell consumers that no purchase is necessary to participate in the sweepstakes, clearly explain how to enter the sweepstakes without a purchase, make it clear to consumers who order magazines on an installment payment plan how much money is due each month, and not imply that consumers have a better chance of winning if they purchased magazines. According to a NAAG official, the sweepstakes subcommittee chair--the Indiana Attorney General--has been identified. However, it was not clear whether other subcommittee members had been selected or whether the subcommittee's work had begun. Generally, the subcommittee members are expected to include representatives from various state Attorneys General offices. --Federal Trade Commission (FTC) Washington, D.C. Washington, D.C. State government agencies (Offices of Attorneys General): --Citizen Assistance (Consumer Affairs) for City of Alexandria --Consumer Affairs Division for Montgomery County --Advertising Mail Marketing Association (AMMA) Washington, D.C. --American Association of Retired Persons (AARP) Washington, D.C. --Arizona State University (Gerontology Program) --Council of Better Business Bureaus (CBBB) --Direct Marketing Association (DMA) Washington, D.C. --National Association of Attorneys General (NAAG) Washington, D.C. --National Consumers League (NCL)/National Fraud Information Center (NFIC) Washington, D.C. --U.S. Public Interest Research Group (USPIRG) Washington, D.C. 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GAO discussed the issues related to the Honesty in Sweepstakes Act of 1998, introduced on June 5, 1998, by Senator Ben Nighthorse Campbell, focusing on: (1) the extent and nature of problems that consumers may have experienced with various sweepstakes mailings; and (2) information related to the mailing of documents that resembled cashier's checks, which are not the negotiable instruments that they appear to be. GAO noted that: (1) it found that comprehensive data that could indicate the full extent of the problems that consumers experienced with mailed sweepstakes material and cashier's check look-alikes were not available; (2) the main reasons officials and representatives gave for the lack of comprehensive data were that: (a) consumers oftentimes did not report their problems; and (b) no centralized database existed from which comprehensive data could be obtained; (3) although comprehensive data were unavailable, the Federal Trade Commission (FTC) and the Postal Inspection Service were two organizations that GAO identified as having some data on consumers' complaints about deceptive mail marketing practices, which could indicate the nature of these types of problems; (4) much of the consumer complaint information, which GAO obtained in a sample from FTC's Consumer Information System, showed that in many instances, consumers were required to remit money or purchase products or services before being allowed to participate in the sweepstakes; (5) information about Postal Inspection Service cases that had been investigated largely involved sweepstakes and cash prize promotions for which up-front taxes or insurance, judging, or handling fees were required before consumers could participate in sweepstakes promotions; (6) GAO was unable to identify examples of consumers' problems with cashier's check look-alikes similar to those involving mailed sweepstakes material because such information was not readily available; (7) two recent initiatives are intended to address consumers' problems with deceptive direct mail marketing practices; and (8) the initiatives are: (a) Project Mailbox, for which various participating organizations, including FTC, the Postal Inspection Service, and 25 state attorneys general, collectively took steps to target organizations that used such practices; and (b) the establishment of a multi-state sweepstakes committee that, among other things, is designed to facilitate cooperation among various states in dealing effectively with companies that attempt to defraud consumers through the use of mailed sweepstakes material.
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DOD's current space network is comprised of constellations of satellites, ground-based systems, and associated terminals and receivers. Among other things, these assets are used to perform surveillance and intelligence functions; detect and warn of attacks; provide communication services to DOD and other government users; provide positioning and precise timing data to U.S. forces as well as other national security, civil, and commercial users; and counter elements of an adversary's space system. DOD categorizes these assets into four space mission areas--each with specific operational functions. (See table 1 for a description of space mission areas, operational functions, and related examples of systems and activities.) The Air Force is the primary procurer and operator of space systems. For fiscal years 2002 through 2007, the Air Force is expected to spend about 86 percent of total programmed space funding of about $165 billion, whereas the Navy, the Army, and other Defense agencies are expected to spend about 8 percent, 3 percent, and 3 percent, respectively. The space surveillance network and other space control systems, some of which are classified, are currently helping to protect and defend space assets or are under development. For example, the Space-Based Surveillance System is being developed to provide a constellation of satellites and other initiatives that will improve the timeliness and fidelity of space situational awareness information. The Rapid Attack Identification and Reporting System, also under development, is expected to ultimately provide notification to Air Force Space Command of threats (radio frequency and laser) impinging upon the right of friendly forces to use space. DOD's space control mission, which endeavors to protect and defend U.S. space assets, is becoming increasingly important. This importance was recognized by the Space Commission that was established by Congress in the National Defense Authorization Act for Fiscal Year 2000to assess a variety of management and organizational issues relating to space activities in support of U.S. national security. Principally: While the commission recognized that organization and management are important, the critical need is national leadership to elevate U.S. national security space interests on the national security agenda. A number of disparate space activities should be merged, organizations realigned, lines of communication opened, and policies modified to achieve greater responsibility and accountability. The relationship between the officials primarily responsible for national security space programs is critical to the development and deployment of space capabilities. Therefore, they should work closely and effectively together to set and maintain the course for national security space programs. Finally, the United States will require superior space capabilities and a cadre of military and civilian talent in science, engineering, and systems operations to remain the world's leading space-faring nation. Among other things, the Space Commission emphasized the importance of increasing the visibility and accountability of space funding. It also recommended that DOD pursue modernization of aging space systems, enhance its command and control structure, and evolve the surveillance system from cataloging and tracking to a system that could provide space situational awareness. We recently reported on the status of implementation of the Space Commission recommendations. We found that DOD has decided to take actions related to 10 of the commission's 13 recommendations, including organizational changes aimed at consolidating some activities, changing chains of command, and modifying policies to achieve greater responsibility and accountability. In addition, we have reported that Over the years, DOD's space acquisition management approach has resulted in each of the services pursuing its own needs and priorities for space. This, in turn, has increased the risk that acquisitions will be redundant and not interoperable. Also, under this approach, there has also been no assurance that the services as a whole are satisfying the requirements of the U.S. Space Command to the maximum extent practicable. DOD continues to face cost and schedule growth for some of its larger, more complex space system acquisitions primarily as a result of not having knowledge on the maturity of necessary technology before entering product development. DOD is now undertaking a wide range of efforts to strengthen its ability to protect and defend space-based assets. Some of these are focused solely on the space control mission while others are broader efforts aimed at strengthening space-related capabilities. The changes are intended to elevate the importance of space within the department; promote greater coordination on space-related activities both within and outside the department, particularly within the intelligence community; reduce redundant systems and capabilities while promoting interoperability; and enable the department to better prioritize space-related activities. At the same time, DOD is making changes to its acquisition and oversight policies that will affect how space programs are developed and managed. Specifically, the U.S. Space Command is developing a space control strategy that is to outline objectives for space control over the next 20 years. Concurrently, DOD is developing a national security space plan that will lay down broader objectives and priorities for space-based programs. As the future executive agent for space, the Air Force created an office to develop and implement the national security space plan and has yet to finalize plans for the organizational realignment of the office of the National Security Space Architect. The National Security Space Architect is responsible for developing architectures--frameworks that identify sets of capabilities--across the full range of DOD and intelligence community space mission areas. In addition, DOD is making changes to its budgeting process to gain greater visibility over space-related spending and has created a "virtual" space major force program for the purpose of identifying what funding is specifically directed toward space efforts. The virtual major force program identifies spending on space activities within other major force programs. This does not change the current process that the military services use to fund their own space programs, but it does aggregate space funding so that the department will be able to compare space funding to DOD's total budget and conduct future trend analyses. Moreover, DOD will be able to identify space control funding from other space-related activities. Lastly, DOD has made changes to its acquisition policy that will affect how space systems are acquired and managed. These changes focus on making sure technologies are demonstrated at a high level of maturity before beginning product development as well as taking an evolutionary, or phased, approach for producing a system. The Air Force is also implementing a new acquisition oversight mechanism for space intended to streamline the time it takes to review and approve a program before moving onto a subsequent stage of development. Table 2 describes some of DOD's efforts related to strengthening space control in more detail. DOD's efforts to strengthen its management and organization of space activities, including space control, are a good step forward, particularly because they seek to promote better coordination among the services involved in space, prioritization of space-related projects, visibility over funding, and interoperability. But there are substantial planning and acquisition challenges involved in making DOD's current space control efforts successful. The Space Commission recognized that stronger DOD-wide leadership and increased accountability were essential to developing a coherent space program. As noted above, one effort to provide stronger leadership and accountability is the development of a space control strategy. Completion of this strategy is a considerable challenge for DOD because it has not yet been aligned with other strategies still being revised and because agreement among the military services on specific roles, responsibilities, priorities, milestones, and end states may prove difficult to achieve. In February 2001, a draft of the space control strategy, prepared by U.S. Space Command, was submitted to the Chairman of the Joint Chiefs of Staff for review, refinement, and submission to the Secretary of Defense. In June 2001, the Chairman stated that it was important that the space control strategy be put on hold until it could be aligned with the national security and national military strategies that were being updated before official submission to the Secretary of Defense. Also, the space control strategy was drafted initially without the benefit of the broader national security space plan to use as a foundation for setting priorities, objectives, and goals. The National Security Space Integration Office expects to complete the space plan in the summer of 2002; however, there are indications that the plan may not be completed until 2003. Whenever the plan is completed, DOD would then have to reexamine the draft space control strategy to ensure alignment with the broader plan. Currently, the services are not satisfied with the draft strategy. Army, Navy, and Air Force officials told us that the draft was not specific enough in terms of what their own responsibilities are going to be and what DOD's priorities are going to be. They also pointed out that there were no specific milestones, only a rough 20-year time frame for achieving a "robust and wholly integrated suite of capabilities in space." Without more specifics in this area, DOD would not be able to measure its progress in achieving goals. According to a U.S. Space Command official, although a final date for issuing the strategy is unknown, comments from the services have been incorporated where appropriate and additional detail has been added to reflect changes in DOD terminology. Without knowing more details, service officials said that they would continue pursuing their own space control programs as they have been. In fact, two services--the Air Force and the Army--have already set their own priorities for space control. For example, Air Force Space Command, in its Strategic Master Plan, lists its first priority under space control as improving space surveillance capability to achieve real-time space situational awareness and provide this information to the warfighter. The Army's Space Master Plan recognized shortfalls in the space control area and identified future operational capabilities for space control that include space-based laser, airborne laser and the congressionally-directed Kinetic Energy Anti-Satellite capability. Another issue that could affect accountability for space control is the lack of a DOD-wide investment plan for space control to guide the development of the services' budget submissions. The Space Commission recognized that increasing funding visibility and accountability is essential to developing a coherent space program. According to the commission, for example, the current decentralized approach of funding satellites from one service's budget and terminals from another's can result in program disconnects and duplication. The newly implemented virtual major force program for space addresses the need for visibility into space funding across the services by aggregating most space funding by service and function. DOD officials stated that the first iteration of the virtual major force program captured a high percentage of space funding and it will be fine tuned in the future years. The virtual major force program for space was designed to include program elements that represent space activities only. Funding for non-space-weapon systems that may have some space related components (such as a Global Positioning System receiver in the bomb hardware of the Joint Direct Attack Munition bombs) are not included in the virtual major force program. Although the virtual major force program provides greater visibility into space funding, it is not intended to provide an investment plan for space. However, the space control systems and funding identified in the virtual major force program, along with priorities outlined in the space control strategy, could be used as a basis for developing an investment plan that would prioritize space control capabilities that DOD needs to develop. Such a plan would benefit DOD by setting DOD-wide priorities and helping the services make decisions on meeting those priorities; including short-, mid-, and long-range time frames to make sure space control activities were carried out as envisioned in DOD's overall goals and the national security space plan; establishing accountability mechanisms to make sure funding is targeted at priority areas; and providing the level of detail needed to avoid program disconnects and duplications. Developing such an investment plan for space control will be a considerable challenge because it will require the services to forgo some of their authority to set priorities. Secondly, DOD will need to identify space capabilities that are scattered across programs and services, and in many instances, are even embedded in non-space-weapon systems. Finally, development of an investment plan for space control will require leadership on the part of the Air Force, as the executive agent for space, because such a plan will have to balance the needs and priorities of all of the services. The changes DOD has made to its acquisition policy embracing practices that characterize successful programs are a positive step that could be applied to the acquisition of space control systems. By separating technology development from product development (system integration and system demonstration) and encouraging an evolutionary approach, for example, the new policy would help to curb incentives to over promise the capabilities of a new system and to rely on immature technologies. Moreover, decisionmakers would also have the means for deciding not to initiate a program if a match between requirements and available resources (time, technology, and funding) was not made. But, so far, DOD has been challenged in terms of successfully implementing acquisition practices that would reduce risks and result in better outcomes--particularly in some of its larger and more complex programs. For example, in 1996, DOD designated the Space-Based Infrared System (SBIRS), consisting of a Low and High program, a Flagship program for incorporating a key acquisition reform initiative aimed at adopting successful practices that would develop systems that are generally simpler, easier to build, and more reliable, and that meet DOD needs. In 2001, we reported that the SBIRS Low program, in an attempt to deploy the system starting in fiscal year 2006 to support a missile defense capability for protecting the United States, was at high-risk of not delivering the system on time or at cost or with expected performance. In particular, we reported that five of six critical satellite technologies had been judged to be immature and would not be available when needed. As stressed in previous GAO reports, failure to make sure technologies are sufficiently mature before product development often results in increases in both product and long-term ownership costs, schedules delays, and compromised performance. The SBIRS Low program has recently undergone restructuring in an attempt to control escalating costs and get back on schedule. In 2001, we reported that the SBIRS High program was in jeopardy because (1) ground processing software might not be developed in time to support the first SBIRS High satellite, and (2) sensors and satellites might not be ready for launch as scheduled due to technical development problems. These difficulties increased the risk that the first launches of SBIRS High sensors and satellites would not occur on time and that mission requirements would not be met. The Under Secretary of the Air Force recently acknowledged that the SBIRS High program was allowed to move through programmatic milestones before the technology was ready. In addition, the Under Secretary of Defense for Acquisition, Technology and Logistics recommended modifications to the SBIRS High requirements to meet realistic cost and performance goals. As we recently testified, there are actions DOD can take to make sure that new acquisition policies produce better outcomes for acquisitions of space control systems (or any other space systems). These include structuring programs so that requirements will not outstrip available establishing measures for success for each stage of the development process so that decisionmakers can be assured that sufficient knowledge exists about critical facets of a product before investing more time and money, and placing responsibility for making decisions squarely in those with authority to adhere to best practices and to make informed trade-off decisions. Our prior reports have recommended actions that DOD could take in these and other areas. DOD recognizes that space systems are playing an increasingly important role in DOD's overall warfighting capability as well as the economy and the nation's critical infrastructure. Its recent actions are intended to help elevate the importance of space within the Department, and also improve coordination, priority setting, and interoperability. But there are substantial challenges facing DOD's efforts to achieve its objectives for space control. Principally, the services and the U.S. Space Command have not agreed to the specifics of a strategy, especially in terms of roles and responsibilities. DOD still lacks an investment plan that reflects DOD-wide space control priorities and can guide the development of the services budget submissions for space control systems and operations. Moreover, it is still questionable whether DOD can successfully apply best practices to its space control acquisitions. Clearly, success for space control will depend largely on the support of top leaders to set goals and priorities, ensure an overall investment plan meets those goals and priorities, as well as encourage implementation of best practices. To better meet the challenges facing efforts to strengthen DOD's space control mission, we recommend that the Secretary of Defense align the development of an integrated strategy with the overall goals and objectives of the National Security Space Strategy, when issued. The Secretary should also ensure that the following factors are considered in finalizing the integrated space control strategy: roles and responsibilities of the military services and other DOD organizations for conducting space control activities, priorities for meeting those space control requirements that are most essential for the warfighter, milestones for meeting established priorities, and end states necessary for meeting future military goals in space control. We further recommend that the Secretary of Defense develop an overall investment plan that: supports future key goals, objectives, and capabilities that are needed to meet space control priorities, and supports the end states identified in the integrated space control strategy, and is aligned with the overall goals and objectives of the national security space strategy. We received written comments on a draft of this report from the Secretary of Defense. DOD concurred with our findings and recommendations. It also offered additional technical comments and suggestions to clarify our draft report, which we incorporated as appropriate. DOD's comments appear in appendix I. To identify DOD's efforts to strengthen its ability to protect and defend its space assets and the challenges facing DOD in making those space control efforts successful, we reviewed the DOD Instruction for Space Control, U.S. Space Command's draft Space Control Strategy, U.S. Space Command's Long Range Plan, military service space master plans, DOD's 1999 Space Policy, the Report of the Commission to Assess United States National Security Space Management and Organization, and the 2001 Quadrennial Defense Review. We also reviewed national and DOD space policies and DOD's Future Years Defense program from fiscal year 2002 through 2007. To understand DOD's efforts and challenges, we reviewed the draft space control strategy and held discussions with officials at the U.S. Space Command, Colorado Springs, Colorado. To gain a better understanding of how the services regarded the draft space control strategy and development of a corresponding investment plan, we held discussions with and obtained documentation from officials at the Air Force Space Command, Peterson Air Force Base, Colorado Springs, Colorado; Air Force Headquarters, Washington, D.C.; the Army Space and Missile Defense Command, Arlington, Virginia; the Naval Space Command Detachment, Peterson Air Force Base, Colorado Springs, Colorado; the Office of the Assistant Secretary of Defense for Command, Control, Communications and Intelligence; the Joint Staff; Under Secretary of Defense Comptroller/Chief Financial Officer and Director, Program, Analysis and Evaluation; the Office of the National Security Space Architect, Fairfax, Virginia; and the RAND's National Security and Research Division, Washington, D.C. To identify the acquisition challenges, we reviewed prior GAO reports on practices characterizing successful acquisition program and held discussions with DOD officials. Specifically, we held discussions with and obtained documentation from representatives of the Under Secretary of Defense for Acquisition, Technology, and Logistics and officials with the Air Force/National Reconnaissance Office Integration Planning Group. We performed our work from July 2001 through July 2002 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretaries of the Army, the Navy, and the Air Force; the Director of the Office of Management and Budget; and interested congressional committees. We will also make copies available to others on request. The head of a federal agency is required under 31 U.S.C. 720 to submit a written statement of actions taken on our recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Reform no later than 60 days after the date of the report and to the Senate and House Committee on Appropriations with the agency's first request for appropriations made more than 60 days after the date of the report. In addition, the report will be available at no charge at the GAO Web site at http://www.gao.gov. If you or your staff have any questions, please contact me at (202) 512-4841 or Jim Solomon at (303) 572-7315. The key contributors to this report are acknowledged in appendix II. Key contributors to this report were Cristina Chaplain, Maricela Cherveny, Jean Harker, Art Gallegos, and Sonja Ware.
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The United States is increasingly dependent on space for its security and well being. The Department of Defense's (DOD) space systems collect information on capabilities and intentions of potential adversaries. They enable military forces to be warned of a missile attack and to communicate and navigate while avoiding hostile action. DOD's efforts to strengthen space control are targeted at seeking to promote better coordination among DOD components, prioritization of projects, visibility and accountability over funding, and interoperability among systems. Among other things, DOD is drafting a space control strategy that is to outline objectives, tasks, and capabilities for the next 20 years. It has also aggregated funding for space programs so that it can compare space funding, including space control funding, to its total budget, make decisions about priorities, and conduct future-trend analyses. In addition, DOD has changed its acquisition policy to include separating technology development from product development and encouraging an evolutionary, or phased, approach to development. There are, however, substantial challenges to making DOD's space control efforts successful. One challenge is putting needed plans in place to provide direction and hold the services accountable for implementing departmentwide priorities for space control. Further, DOD's draft space control strategy has been completed and does not yet define roles and responsibilities among the services, departmentwide priorities and end states, and concrete milestones. Finally DOD's aggregation of space funding is not a plan that targets investments at priority areas for DOD overall.
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Risk management has been endorsed by the Congress, the President, and Secretary of DHS as a way to direct finite resources to those areas that are most at risk of terrorist attack under conditions of uncertainty. The purpose of risk management is not to eliminate all risks, as that is an impossible task. Rather, given limited resources, risk management is a structured means of making informed trade-offs and choices about how to use available resources effectively and monitoring the effect of those choices. Thus, risk management is a continuous process that includes the assessment of threats, vulnerabilities, and consequences to determine what actions should be taken to reduce or eliminate one or more of these elements of risk. Risk management includes a feedback loop that continually incorporates new information, such as changing threats or the effect of actions taken to reduce or eliminate identified threats, vulnerabilities, and/or consequences. Because we have imperfect information for assessing risks, there is a degree of uncertainty in the information used for risk assessments (e.g., what the threats are and how likely they are to be realized). As a result, it is inevitable that assumptions and policy judgments must be used in risk analysis and management. It is important that key decision makers understand the basis for those assumptions and policy judgments and their effect on the results of the risk analysis and the resource decisions based on that analysis. Since fiscal year 2006, DHS has applied a three-step process which incorporates analyses of risk and effectiveness, to select eligible urban areas and allocate UASI and SHSP funds (see fig. 1): 1. Implementation of a risk analysis model to calculate scores for states and urban areas, defining relative Risk, as the product of Threat, Vulnerability, and Consequences. 2. Implementation of an effectiveness assessment, including a peer review process, to assess and score the effectiveness of the proposed investments submitted by the eligible applicants. 3. Calculation of a final allocation of funds based on states' and urban areas' risk scores as adjusted by their effectiveness scores. As a result of the Post-Katrina Emergency Reform Act, FEMA is now responsible for the nation's homeland security preparedness effort to define what needs to be done, where, and by whom (roles and responsibilities); how it should be done; and how well it should be done-- that is, according to what standards. This is a complex but critically important responsibility. The principal national documents designed to address each of these are, respectively, the National Response Framework (and its associated annexes), the National Incident Management System, and the National Preparedness Guidelines. To develop preparedness goals and determine the tasks and capabilities needed by first responders on a nationwide basis, DHS used an approach known as capabilities-based planning to develop the national Target Capabilities List. The list includes specific goals, requirements, and metrics for 36 capabilities needed at the local, state, or federal level to prepare for, respond to, and recover from natural or man-made disasters. DHS defined these capabilities generically and expressed them in terms of desired operational outcomes and essential characteristics, rather than dictating specific, quantifiable responsibilities to the various jurisdictions. Because no single jurisdiction or agency would be expected to perform every task, possession of a target capability could involve enhancing and maintaining local resources, ensuring access to regional and federal resources, or some combination of the two. The original list has since been refined, and FEMA released the most recent version of the list, with 37 capabilities, in September 2007. The Implementing Recommendations of the 9/11 Commission Act (9/11 Act) of 2007 further defined FEMA's role and coordination processes for working with states and urban areas in awarding homeland security grants. For example, the 9/11 Act requires FEMA to provide eligible metropolitan areas with the opportunity to submit relevant information prior to FEMA's initial assessment of the relative threat, vulnerability, and consequences each area faces from acts of terrorism. This opportunity is to allow potential grantees to correct any erroneous or incomplete information that will be the basis of FEMA's initial assessment. DHS has used an evolving risk-based methodology to identify the states and urban areas eligible for HSGP grants and the amount of funds they receive. For example, the fiscal year 2005 risk analysis model largely relied on measures of population and population density to determine the relative risk of potential grant recipients. The fiscal year 2006 process introduced assessments of threat, vulnerability and consequences of a terrorist attack in assessing risk. The fiscal year 2006 risk analysis model estimated relative risk from two perspectives--asset-based and geographic--then combined the assessments, assigning twice as much weight to geographic as asset-based risk. In DHS's view, asset-based and geographic risks are complementary and provide a "micro- and macro-" perspective of risk, respectively. In calculating these relative risk scores and addressing the uncertainties in estimating relative risk, policy and analytic judgments were required. For example, according to DHS officials, DHS made the judgment to assign geographic risk a weight of 1.0 and asset-based risk a weight of 0.5, since a potential loss of lives within an area would contribute to how geographic risk is assessed. Some of the factors used in the fiscal year 2006 risk analysis model included: the number of specific types of reports or events, such as reports of suspicious incidents; the number of visitors a state or urban area received from countries of interest; and population. In addition to modifications to DHS's risk analysis model, DHS adopted an effectiveness assessment for fiscal year 2006 to determine the anticipated effectiveness of the various risk mitigation investments urban areas proposed, which affected the final amount of funds awarded to eligible areas. The risk analysis method for fiscal year 2007--which is largely unchanged for fiscal year 2008, according to our ongoing work--was changed substantially from the fiscal year 2006 process, and further exemplifies the continuing evolution in DHS's approach to its risk methodology for grant allocation. Given the uncertainties inherent in risk assessment, the methodology uses a combination of empirical data (e.g., population, asset location) and policy judgment (e.g., the nature of the threat for specific areas and the weights to be assigned to specific variables in the model such as critical infrastructure, and population and population density). According to DHS officials, the fiscal year 2007 risk analysis model integrates the separate analyses for asset-based and geographic-based risk used in fiscal year 2006, and includes more sensitivity analysis in determining what the final results of its risk analysis should be. DHS officials said the primary goal was to make the process more transparent and more easily understood, focusing on key variables and incorporating comments from a variety of stakeholders regarding the fiscal year 2006 process. Figure 2 provides an overview of the factors included in the risk analysis model for fiscal year 2007 and, according to our ongoing work, for fiscal year 2008 and their relative weights. The maximum relative risk score possible for a given area was 100. The Threat Index accounted for 20 percent of the total risk score; Vulnerability and Consequences accounted for 80 percent. For the purposes of the model, DHS considered all areas of the nation equally vulnerable to attack and assigned every state and urban area a vulnerability score of 1.0. Thus, as a practical matter, the final risk score for fiscal years 2007 and 2008 is determined by the threat and consequences scores. Threat: The Threat Index accounted for 20 percent of the total risk score, which was calculated by the intelligence community by assessing threat information for multiple years (generally, from 9/11 forward) for all candidate urban areas and categorizing urban areas into one of four tiers. Tier I included those at highest threat, relative to the other areas, and tier IV included those at lowest threat relative to the others. DHS's Office of Intelligence and Analysis performed this review and provided these threat assessments and corresponding threat values for each urban area. In contrast, for the 2006 grant cycle, DHS used total counts of threats and suspicious incidents and incorporated these into its model. The final threat assessments are approved by the intelligence community--the Federal Bureau of Investigation, Central Intelligence Agency, National Counter- Terrorism Center, and the Defense Intelligence Agency--along with the DHS Under Secretary for Intelligence & Analysis and the Secretary of DHS, according to DHS officials. Vulnerability and Consequences: Vulnerability and Consequences accounted for 80 percent of the total risk score and were represented by the following four indices: Population Index (40 percent): This variable included nighttime population and military dependant populations for states and urban areas, based upon U.S. Census Bureau and Department of Defense inputs. In addition, for urban areas, population density, commuters, and visitors were also factored into this variable, using data from private entities. Economic Index (20 percent): This variable considered the economic value of the goods and services produced in either a state or an urban area. For states, this index was calculated using U.S. Department of Commerce data on their percentage contribution to Gross Domestic Product. For UASI urban areas, a parallel calculation of Gross Metropolitan Product was incorporated. National Infrastructure Index (15 percent): This variable focused on over 2,000 Tier I and Tier II critical infrastructure/key resource assets that were identified by DHS's Office of Infrastructure Protection. Tier I assets or systems are those that if attacked could trigger major national or regional impacts similar to those experienced during Hurricane Katrina or 9/11. Tier II assets are other highly consequential assets with potential national or regional impacts if attacked. National Security Index (5 percent): This variable considered the presence of three key national security factors: whether military bases are present in the state or urban area; how many critical defense industrial base facilities are located in the state or urban area; and the total number of people traversing international borders. Information on these inputs comes from the Department of Defense and DHS. To assess vulnerability and consequences, DHS specifically wanted to capture key land and sea ports of entry into the United States and the location of defense industrial base facilities and nationally critical infrastructure facilities. For fiscal year 2007 and, according to our ongoing work, for fiscal year 2008, DHS considered most areas of the country equally vulnerable to a terrorist attack, given freedom of movement within the nation; and focused on the seriousness of the consequences of a successful terrorist attack. Nationwide more than 2,000 critical infrastructure assets were included in the risk model and selected on the basis of analysis by DHS infrastructure protection analysts, sector- specific federal agencies, and the states. According to DHS, these critical infrastructure assets were grouped into two tiers: Tier 1 assets encompassed those that if attacked could cause major national or regional impacts similar to those from Hurricane Katrina or 9/11, while Tier 2 assets were those with potential national or regional impacts if attacked. On the basis of DHS's Office of Infrastructure Protection analysis, Tier I assets were weighted using an average value three times as great as Tier II assets. According to DHS officials, defense industrial base assets were included in the national security index and all other assets in the national infrastructure index. Effectiveness Assessment Used to Adjust Risk Scores Since fiscal year 2006, DHS has also implemented an Effectiveness Assessment to assess and score the effectiveness of the proposed investments submitted by grant applicants in addition to determining relative risk using the risk analysis model. This effectiveness assessment process has remained largely unchanged since it was first introduced by DHS. To assess the anticipated effectiveness of the various risk mitigation investments that states and urban areas proposed, DHS required states and urban areas to submit investment justifications as part of their grant application. The investment justifications included up to 15 "investments" or proposed solutions to address homeland security needs, which were identified by the states and urban areas through their strategic planning process. DHS used subject-matter experts as peer reviewers to assess these investment justifications. The criteria reviewers used to score the investment justifications included the following categories: relevance to the National Preparedness Guidance and to state and local homeland security plans, anticipated impact, sustainability, regionalism, and the implementation of each proposed investment. Reviewers on each panel assigned scores for these investment justifications, which according to DHS officials were averaged to determine a final effectiveness score for each state and urban area applicant. DHS then used these effectiveness assessment scores to calculate the final allocation of funds to states and urban areas. According to DHS officials and HSGP grant assistance documents we reviewed, DHS communicates with its state and local stakeholders by: (1) providing to each state and urban area the individual threat assessments that DHS is using to calculate the risk analysis model's Threat Index; (2) validating the nonpublic, critical infrastructure assets that comprise the risk analysis model's National Infrastructure Index; (3) providing midpoint reviews of states' and urban areas' draft investment justification proposals that are later reviewed during DHS's effectiveness assessment process; (4) providing technical assistance as states and urban areas prepare the documentation for their grant applications; and (5) convening conferences to solicit stakeholder feedback. DHS provides threat assessments for state and urban areas. DHS's Office of Intelligence and Analysis (I&A) officials said they develop and provide threat assessments to the states' and urban areas' grant applicants prior to the grant application process for their review. State and urban area strategic planning and grant planning officials use this information to develop their grant investment justifications, according to DHS officials. I&A officials said they provide secret and nonsecret versions of the information so that state or urban area officials who do not have the appropriate clearances required to view the secret version of their threat assessments will still have access to some of the threat information. They said they are working with local law enforcement agencies on a way to address such clearance issues. DHS validates the nonpublic, critical infrastructure assets used in the risk analysis model. DHS officials also said that the agency uses a collaborative, multistep process to create a list of national critical infrastructure assets for use in the National Infrastructure Index, one of the four indices that comprise the Vulnerability and Consequences component of the risk analysis model. According to DHS officials, they use a step-by-step process to identify the nation's Tier 1 and Tier 2 critical infrastructure assets. First, DHS's Office of Infrastructure Protection (OIP) works with sector-specific agencies to develop criteria used to determine which assets should be placed in a threat tier. Second, private-sector companies vet the criteria through sector-specific councils that review the criteria and provide feedback to DHS OIP. Third, the infrastructure office finalizes the criteria list and provides the list to the sector-specific agencies and asks states to nominate assets within their jurisdictions that match the criteria. Finally, the infrastructure office and the sector-specific agencies review nominated assets to decide which assets comprise the final Tier 1/Tier 2 list. In 2007, DHS began to allow sector-specific agencies to resubmit for reconsideration assets that are not initially selected for the list to ensure the consideration of potential critical infrastructure assets in future years. Enacted in August 2007, the 9/11 Act required DHS to provide eligible metropolitan areas with the opportunity to submit information that they believe to be relevant to the determination of the threat, vulnerability, and consequences they face from acts of terrorism, prior to FEMA conducting each initial assessment, so that any erroneous or incomplete information can be corrected. According to FEMA officials, DHS implemented this provision mainly through the outreach and communication efforts described above. DHS provides midpoint reviews of states' and urban areas' investment proposals. FEMA officials said that, for the fiscal year 2007 effectiveness assessment process, DHS offered a midpoint technical review of states' and urban areas' draft 2007 Investment Justifications prior to the formal submission of these proposals to FEMA's peer review process. DHS officials said that they performed an after-action analysis of this effort and found states and urban areas that made use of the midpoint reviews had effectiveness scores that on average were 6 percent higher than those for states and urban areas that did not take advantage of this DHS service. DHS provides technical assistance as states and urban areas prepare investment documentation. DHS also provides Program Management Technical Assistance, and Investment Planning Technical Assistance workshops to assist states and urban areas. For example, the Program Management Technical Assistance service is designed to help the State Administrative Agency with day-to-day program management in planning, managing, and evaluating state programs in the context of the National Preparedness Guidance, according to DHS. They said Program Management Technical Assistance helps state administrators use DHS's Program Management Handbook to manage programs that span agencies, jurisdictions, and disciplines, including the private sector. DHS also offers guidance on how to enhance existing state and urban area Homeland Security Strategies and Enhancement Plans. DHS convenes conferences to solicit stakeholder feedback. Finally, DHS has convened conferences in an effort to solicit stakeholder feedback after the fiscal years 2006 and 2007 grants were awarded. In July 2006, DHS convened a Homeland Security Grant Program After-Action conference to gather feedback on the UASI grant award process. DHS also assembled working groups to discuss and assess homeland security planning, the HSGP guidance and application, the risk assessment, and the effectiveness assessment. DHS officials told us that the conference provided a feedback loop intended to bolster stakeholder support and promote transparency. The state and local partners who participated in the working groups at the conference developed 32 recommendations to improve the HSGP process. For example, one of the risk assessment working group's recommendations was that DHS should provide detailed briefings to state and local partners on the core components of the risk methodology used in the fiscal year 2006 process as one step to improve the transparency of the risk analysis process. DHS also convened a similar after-action conference in early August 2007 to solicit stakeholder feedback on the fiscal year 2007 HSGP and hosted three regional conferences in the fall of 2007 to foster collaboration among regional partners and seek additional feedback. From fiscal years 2002 through 2007, DHS obligated about $19.6 billion in grants, the purpose of which was to strengthen the capabilities of state, local, and tribal governments and others to prepare for and respond to major disasters of any type or cause. About $7 billion of this total was unexpended as of January 2008. As might be expected, the more recent the fiscal year, the higher the unexpended balance (see fig. 3). For example, the Homeland Security and UASI grant awards are announced in May or June of each year--or about 3 to 4 months before the end of the fiscal year. The awards for fiscal year 2007 were announced in May 2007. Thus, one would expect large unexpended balances for the most recent fiscal year because the grant recipients would have had only a few months to use their funds prior to the end of the fiscal year. In 2005, we reported on DHS's efforts to distribute grants and found that the Congress, DHS, states, and localities had acted to expedite grant awards and distribution by setting time limits for the grant application, award, and distribution processes and by instituting other procedures. We concluded that the ability of states and localities to spend grant funds expeditiously was complicated by the need to fulfill state and local legal and procurement requirements, which in some cases added months to the purchasing process. We also reported that some states had modified their procurement practices and DHS was identifying best practices to aid in the effort, but challenges remained, such as continuing legal and procurement requirements that slowed the process. For example, once the grant funds are awarded to the states and then subgranted to the local jurisdictions or urban areas, certain legal and procurement requirements may have to be met, such as a city council's approval to accept grant awards. Or, if the state legislature must approve how the grant funds will be expended and is not in session when the grant funds are awarded, it could take as long as 4 months to obtain state approval to spend the funds. We reported a variety of steps that had been taken by states, DHS, and the Congress to streamline the expenditure of grant funds. For example: Some states, in conjunction with DHS, had modified their procurement practices to expedite the procurement of equipment and services by establishing centralized purchasing systems that allow equipment and services to be purchased by the state on behalf of local jurisdictions, freeing them from some local legal and procurement requirements. Several states had developed statewide procurement contracts that allow local jurisdictions to buy equipment and services using a prenegotiated state contract. DHS had enhanced equipment procurement options through agreements with the U.S. Department of Defense's Defense Logistics Agency and the Marine Corps Systems Command, to allow state and local jurisdictions to purchase equipment directly from their prime vendors. These agreements provide an alternative to state and local procurement processes and, according to DHS, often result in a more rapid product delivery at a lower cost. The fiscal year 2005 DHS appropriations legislation included a provision that exempted formula-based grants (e.g., the State Homeland Security Grant Program grants) and discretionary grants, including the Urban Areas Security Initiative and other grants, from requirements in the Cash Management Improvement Act that provide for reimbursement to states and localities only after they have incurred an obligation, such as a purchase order, to pay for goods and services. Subsequent DHS guidance allowed states and localities to draw down funds up to 120 days prior to expenditure. We do not know the extent to which the actions that states and localities have taken to address the obstacles that affected their ability to use funds expeditiously (but effectively) have succeeded. We were unable to examine trends in expended and unexpended obligations for individual grants across fiscal years due to limitations in the budget data provided by FEMA for this hearing. For example, we were unable to track HSGP funding data across multiple fiscal years, such as the amount of fiscal year 2005 funds that were expended in fiscal years 2005, 2006, and 2007. In addition, we found that reporting categories were not consistent across fiscal years. Grant program data were collapsed in one fiscal year and compiled differently in another year. According to one DHS official, while the consolidation of all DHS grant programs into FEMA provides FEMA with an opportunity to standardize and enhance its management of grant allocation and distribution, this administrative transition has also resulted in some reorganization of accounting functions, and institutionalizing the maintenance of grant funding data is still being addressed at this time. Whatever the cause, the inconsistency in reporting on grant expenditures across fiscal years could hinder FEMA's ability to provide the Congress with information on trends in expenditures over time for specific grants. As part of our ongoing work in reviewing DHS grant allocation and management efforts, we plan to determine whether the data FEMA maintains on grant expenditures across fiscal years allows FEMA to analyze trends in grant obligations and expenditures. While DHS has distributed over $19 billion in federal emergency preparedness funding to states, localities, and territories since fiscal year 2002, and taken steps to gather information, establish goals and measures, and measure progress, we still know little about how states have used federal funds to build their capabilities or reduce risks. Nor do we know how effective this national investment has been because DHS's monitoring of homeland security grant expenditures does not provide a means to measure the achievement of desired program outcomes to strengthen the nation's homeland security capabilities. In March 2007, we testified before this Committee that a comprehensive and in-depth oversight agenda requires assessing state and local capabilities and the use of federal grants in building and sustaining those capabilities. However, all levels of government are still struggling to define and act on the answers to basic-- but hardly simple--questions about emergency preparedness and response: What is important (that is, what are our priorities)? How do we know what is important (e.g., risk assessments, performance standards)? How do we measure, attain, and sustain success? On what basis do we make necessary trade-offs, given finite resources? DHS has limited information on which to base the answers to these questions. We have identified the need for such capabilities-based assessment and reporting of the effectiveness of federal grant investments in several DHS grant programs. For example, in our review of cargo tanker emergency response in December 2007, we recommended that the Secretary of Homeland Security work with federal, state, and local stakeholders to develop explicit performance measures for emergency response capabilities and use them in risk-based analyses to set priorities for DHS grant programs in acquiring needed response resources. DHS responded that it was taking the recommendation under advisement and was exploring approaches to address our recommendation. Similarly, in our review of DHS's efforts to improve interoperable communications in April 2007, we reported that no process has been established for ensuring that states' grant requests are consistent with their statewide plans and long- term objectives for improving interoperability. We recommended that DHS assess how states' grant requests support their statewide communications plans and include the assessment as a factor in making DHS grant allocation decisions. Although DHS did not comment on this recommendation at the time, in August 2007 DHS officials told us they were working to ensure that all grant funding is tied to statewide interoperable communications plans. In a May 2007 testimony, we noted that more immediate congressional attention might focus on evaluating the construction and effectiveness of the National Preparedness System, which is mandated under the Post- Katrina Reform Act. DHS has taken steps to develop and issue key components of the system, including a national domestic all-hazards preparedness goal and readiness metrics and standards for preparedness in the form of target capabilities. Specifically, in September 2007, DHS issued a goal for national preparedness, now referred to as the National Preparedness Guidelines. According to DHS, the guidelines establish "a vision for national preparedness and provide a systematic approach for prioritizing preparedness efforts across the Nation," and generally define a goal for the National Preparedness system. The guidelines are based on a capability-based planning process that identified target capabilities that are to be then used to establish measures for preparedness. According to DHS officials, one way DHS is attempting to monitor the development of emergency preparedness capabilities is through the Effectiveness Assessment described above, that began as part of DHS's fiscal year 2006 HSPG grant guidance. According to program requirements, eligible recipients must provide an "investment justification" with their grant application that links their investments to the initiatives outlined in their state's Program and Capability Enhancement Plan. DHS officials have said that they cannot yet assess how effective the actual investments from grant funds are in enhancing preparedness and mitigating risk because they do not yet have the metrics to do so and there is insufficient historical information from the grant monitoring process to assess the extent to which states and urban areas are building capabilities. The Post-Katrina Reform Act established a requirement to create another source of information on state capabilities. The act calls for an annual preparedness report from all states by January 4, 2008, and annually thereafter, but FEMA has extended the deadline for this requirement. In December 2007, FEMA extended the State Preparedness Report deadline from January 4 to March 31, 2008 and requested that each state administrative agency submit a brief letter providing a status update on its State Preparedness Report by early this year. The state reports are to include assessments of: State compliance with the national preparedness system, the National Response Framework, the National Incident Management System, and other related plans and strategies. Current capability levels and a description of target capability levels. Resource needs to meet the preparedness priorities established in conjunction with the Target Capabilities List, including (1) an estimate of the amount of expenditure required to attain the preparedness priorities, and (2) the extent to which the use of federal assistance during the preceding fiscal year achieved the preparedness priorities. Beginning in October 2007, DHS is also responsible for an annual federal preparedness report that is to include, among other things, an assessment of the extent to which the use of federal assistance during the preceding fiscal year achieved the preparedness priorities established under the act. Since 2005, DHS has produced an Annual Report on Preparedness Funding, which includes data on the obligation, expenditure status, and use of funds for all major federal preparedness grants--including non-DHS grants--awarded to states, localities, and other nonfederal entities. According to DHS, this effort is designed to provide decision makers with critical preparedness funding information as they determine how to best allocate resources to achieve target levels of capability to prevent, prepare, respond to, and recover from major events, especially terrorism. However, the report notes the information is of limited usefulness because federal departments and agencies interpret and define the terms obligation, expenditure status, and use of funds differently. The report provides a national-level summary of the use of grant funds such as equipment or training, rather than an assessment of state capability enhancements provided as a result of federal grant funding. According to DHS, subsequent reports may provide more detailed analysis and findings, as consistent procedures and definitions are implemented across grant programs and departments. The task of enhancing first responder capabilities across the nation is a complex and daunting one. DHS must continue to support FEMA's efforts to work with state, local, and tribal governments, and the private sector on the tasks it has begun. At the same time, these stakeholders must recognize that the process is iterative, will include periodic adjustments and refinements, and that risks are not equally distributed across the nation. As the principal federal agency now responsible for preparedness and response, FEMA has a unique opportunity to evaluate how it can most effectively target and integrate grants with its other efforts to enhance the nation's all-hazard disaster preparedness and response system. This can best be done by viewing these grants collectively, rather than individually. It is also important that FEMA and grant recipients be able to assess and report on how the grants have been used to enhance emergency preparedness and response capabilities and reduce risk. We look forward to working constructively with this Committee, FEMA, and DHS in the future to continue to build a national emergency preparedness system that we all want and our nation deserves. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the Subcommittees may have at this time. For further information about this statement, please contact William O. Jenkins Jr., Director, Homeland Security and Justice Issues, on (202) 512- 8777 or [email protected]. In addition to the contact named above, the following individuals from GAO's Homeland Security and Justice Team also made major contributors to this testimony: Chris Keisling, Assistant Director; John Vocino, Analyst- in-Charge; Michael Blinde, Analyst; and Linda Miller, Communications Analyst. Department of Homeland Security: Progress Report on Implementation of Mission and Management Functions. GAO-07-454. Washington, D.C.: August 17, 2007. Homeland Security: Observations on DHS and FEMA Efforts to Prepare for and Respond to Major and Catastrophic Disasters and Address Related Recommendations and Legislation. GAO-07-1142T. Washington, D.C.: July 31, 2007. Homeland Security: Observations on DHS and FEMA Efforts to Prepare for and Respond to Major and Catastrophic Disasters and Address Related Recommendations and Legislation, GAO-07-835T Washington, D.C.: May 15, 2007. Homeland Security: Observations on DHS and FEMA Efforts to Prepare for and Respond to Major and Catastrophic Disasters and Address Related Recommendations and Legislation. GAO-07-835T. Washington, D.C.: May 15, 2007. First Responders: Much Work Remains to Improve Communications Interoperability, GAO-07-301 Washington, D.C.: Apr. 2, 2007. Homeland Security: Preparing for and Responding to Disasters. GAO-07- 395T. Washington, D.C.: March 9, 2007. Passenger Rail Security: Federal Strategy and Enhanced Coordination Needed to Prioritize and Guide Security Efforts. GAO-07-583T. Washington, D.C.: March 7, 2007. Homeland Security: Applying Risk Management Principles to Guide Federal Investments. GAO-07-386T. Washington, D.C.: February 7, 2007. Homeland Security Grants: Observations on Process DHS Used to Allocate Funds to Selected Urban Areas. GAO-07-381R. Washington, D.C.: February 7, 2007. Homeland Security First Responder Grants: Cash Management Improvement Act Exemption and Cash Advance Funding Require Additional DHS Oversight. GAO-07-68. Washington, D.C.: December 22, 2006. Emergency Preparedness and Response: Some Issues and Challenges Associated with Major Emergency Incidents. GAO-06-467T. Washington, D.C.: February 23, 2006. Homeland Security: Managing First Responder Grants to Enhance Emergency Preparedness in the National Capital Region. GAO-05-889T. Washington, D.C.: July 14, 2005. Homeland Security: DHS' Efforts to Enhance First Responders' All- Hazards Capabilities Continue to Evolve. GAO-05-652. Washington, D.C.: July 11, 2005. Homeland Security: Management of First Responder Grant Programs and Efforts to Improve Accountability Continue to Evolve. GAO-05-530T . Washington, D.C.: April 12, 2005. Homeland Security: Management of First Responder Grant Programs Has Improved, but Challenges Remain. GAO-05-121. Washington, D.C.: February 2, 2005. Homeland Security: Effective Regional Coordination Can Enhance Emergency Preparedness. GAO-04-1009. Washington, D.C.: September 15, 2004. Homeland Security: Federal Leadership Needed to Facilitate Interoperable Communications Between First Responders. GAO-04-1057T . Washington, D.C.: September 8, 2004. Homeland Security: Coordinated Planning and Standards Needed to Better Manage First Responder Grants in the National Capital Region. GAO-04- 904T. Washington, D.C.: June 24, 2004. Homeland Security: Management of First Responder Grants in the National Capital Region Reflects the Need for Coordinated Planning and Performance Goals. GAO-04-433. Washington, D.C.: May 28, 2004. Emergency Preparedness: Federal Funds for First Responders. GAO-04- 788T. Washington, D.C.: May 13, 2004. 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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Since 2002, the Department of Homeland Security (DHS) has distributed over $19 billion in homeland security grants to enhance the nation's preparedness and response capabilities. The Federal Emergency Management Agency (FEMA) is responsible for all preparedness efforts including allocating and managing these grants. This testimony examines (1) the process and methods to allocate homeland security grants to state and local governments, (2) how DHS communicates with states and localities in making grant allocation decisions, (3) what challenges affect the expeditious spending of DHS grant funds by states and localities; and (4) the extent that DHS measured program outcomes as part of its efforts to monitor the expenditure of grant dollars. GAO's testimony is based on products issued from April 2005 through July 2007 on DHS's grant management system, and on GAO's ongoing mandated work related to FEMA's risk-based grant distribution processes for fiscal years 2007 and 2008. To conduct this work, GAO reviewed relevant documents on FEMA's risk analysis model and interviewed agency officials. DHS uses an evolving risk-based methodology to identify the urban areas eligible for homeland security grants and the amount of funds states and urban areas receive. DHS designed the methodology to measure the relative risk of a given state or urban area using a risk analysis model that defined Risk as the product of Threat times Vulnerability and Consequences (R = T * (V & C)). Given the uncertainties inherent in risk assessment, the methodology uses a combination of empirical data (e.g., population, asset location) and policy judgment (e.g., the nature of the threat for specific areas and the weights to be assigned to specific variables in the model such as critical infrastructure, population, and population density). According to FEMA officials and GAO's review of homeland security grant assistance documents, FEMA communicates with its state and local stakeholders by (1) providing individual threat assessments that DHS is using for its risk analysis model to each state and urban area, (2) validating the nonpublic national infrastructure data that are also part of the risk analysis model, (3) reviewing states' and urban areas' draft investment proposals that are later submitted and rated during DHS's effectiveness assessment process, (4) providing technical assistance as states and urban areas prepare grant applications, and (5) holding post-award conferences to solicit stakeholder feedback. In April 2005, GAO reported that the ability of states and localities to spend grant funds expeditiously was complicated by the need to fulfill legal and procurement requirements, which in some cases added months to the purchasing process. GAO also reported a variety of steps that had been taken by states, DHS, and the Congress to streamline the expenditure of grant funds. However, GAO was unable to examine trends in obligations and expenditures for grant programs across fiscal years because the budget data FEMA provided did not specify grant expenditures by fiscal year and reporting categories were not consistent across fiscal years. Although DHS has taken some steps to establish goals, gather information, and measure progress, its monitoring of homeland security grant expenditures does not provide a means to measure the achievement of desired program outcomes. FEMA's current efforts do not provide information on the effectiveness of those funds in improving the nation's capabilities or reducing risk. DHS leadership has identified this issue as a high priority, and is trying to develop a more quantitative approach to accomplish the goal of using this information for the more strategic purpose of monitoring the achievement of program goals, according to FEMA officials.
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Section 5164 of the Omnibus Trade and Competitiveness Act of 1988 amended the Metric Conversion Act of 1975 and designated the metric system as the preferred system of weights and measurements for U.S. trade and commerce. The major reasons given for converting to metric are international trade competitiveness and ease of use. Since the United States is part of a global economy, the metrication of its manufacturing sector is viewed as an important factor in remaining competitive in world markets. Critics argue that although manufacturing may convert, there seems to be no compelling reason for converting highway signs. The American Association of State Highway and Transportation Officials (AASHTO) has stated that it is difficult to determine that metrication would yield any substantial benefits to the highway industry. Others argue that the metric system is simpler and, once learned, more efficient than English measurement. Section 5164 establishes a policy that requires each federal agency to use the metric system in its procurements, grants, and other business-related activities to the extent economically feasible by the end of 1992. However, conversion may not be required if it is impractical or if it is likely to cause significant inefficiencies, or loss of markets to U.S. firms. The act requires each federal agency to establish guidelines to carry out the policy. In addition, Executive Order No. 12770, signed in July 1991, requires, among other things, that executive branch departments and agencies formulate a metric transition plan by November 30, 1991. The Department of Transportation (DOT) issued its metric conversion plan in 1990 and established policy and administrative procedures for changing to the metric system. DOT required each of its nine agencies to develop a conversion plan and include specific dates for the changeover to metric. In addition, DOT's policy guidance requires that if an agency identifies an area in which metric conversion is deemed to be impractical or inefficient, it can make an exception to the law if the exception is supported by an analysis justifying such action. Any requested exception is submitted to the Secretary of Transportation for coordination with the other DOT agencies before approval is given. To date, FHWA has not analyzed any aspects of its proposed metric conversion plan, including converting signs to metric units, to determine if an exception was warranted. Only one of DOT's modal agencies--the Federal Aviation Administration (FAA) has--requested program exceptions to metric conversion. FHWA established a metric work group in December 1990 to develop a conversion plan and timetable. The work group proposed a 5-year transition plan with complete metric conversion by September 30, 1996. After this date, all construction contracts advertised for bids for federal lands, highways, and federal-aid construction would have to contain only metric measurements. As a result, highway and bridge contractors, engineers, equipment and materials manufacturers and suppliers, and state and local governments will have to perform their work in metric units or will be ineligible for federal dollars for highway construction projects. Target dates were set for several key program elements and activities, including converting highway signs, as shown in table 1. By the end of 1995, full conversion is expected for data collection and reporting systems such as the Highway Performance Monitoring System, which collects state-level data on the condition and performance of highways. Furthermore, 39 state departments of transportation will have converted, to metric units, their manuals and procedures that guide highway construction and maintenance. According to FHWA, most state DOTs will meet FHWA's target dates for most elements of metric conversion. Although FHWA was moving forward on other aspects of converting its highway program to metric, on June 27, 1994, it issued a Federal Register notice apprising the public that the agency had postponed the September 30, 1996, deadline for highway sign conversion until at least after 1996. FHWA officials said that they would establish revised implementation requirements sometime after 1996 and that sign conversion is still an agency goal. The officials said that postponement was necessary because of recent legislative prohibitions on the use of federal-aid highway funds for this activity and because of negative comments received on FHWA's August 31, 1993, Federal Register notice. During the last 2 fiscal years, the Congress included provisions in DOT's appropriations bills that prohibited the use of federal-aid funds for placing metric signs on our nation's roads. Concerns about the cost of conversion have also led to several other legislative actions. For example, the bill to designate the National Highway System (NHS) introduced in the Senate in February 1995 prohibits DOT from requiring states to convert highway signs to metric. In the last session of the Congress, the House passed an NHS bill that included a similar provision. While an NHS bill has not been introduced in the House in this session, HR 1173 has been introduced to prohibit the expenditure of federal funds for constructing or modifying highway signs that are expressed only in metric units. At least one state--Virginia--also passed a law in 1994 that prohibits the use of state funds for converting highway signs to metric units. Negative responses to FHWA's August 1993 notice also contributed to the agency's postponement of the metric signage requirement. Overall, about 85 percent of the respondents (2,288 out of 2,731) were opposed to converting English measurement signs to metric units. Most respondents cited the cost involved in converting, and a majority said that the funds could be better used to repair roads and bridges. Several local officials commented that the conversion was another federal mandate without thought of how it would be locally financed. Furthermore, several states that responded requested special funding and an education/public information program before implementing metric signage. Most states have not taken any action to convert their signs to metric units. However, Alabama and Arizona are planning for full conversion of highway signs to metric units. In addition to changing highway signs, such as speed limit and direction signs, to metric units, the Alabama DOT's strategy includes changing milepost markers to kilometer posts. The state DOT has recently received approval from FHWA to use federal-aid funds to install kilometer posts as a reference system to be used for the collection of highway data. Since this is a reference system and will not replace the milepost markers, FHWA determined that the use of federal-aid funds for the reference system would not violate the prohibition in the fiscal year 1995 appropriations act. Although FHWA has postponed the requirement for states to convert their highway signs to metric units, it continues to be an agency goal. As such, activities that support sign conversion continue. For example, FHWA is currently converting the Manual on Uniform Traffic Control Devices into dual units--English and metric. This manual provides federal guidance to the states on all aspects of road signs. FHWA detailed three options for converting highway signs in an August 31, 1993, Federal Register notice to obtain public comment. Option 1: Replace highway signs through routine maintenance over 4 to 7 years. Some signs would be in metric and some in English until all signs were replaced. Option 2: Convert all highway signs over a 6-month to 1-year period. Priority roads would be converted quickly while other roads would be phased in over a longer period of time. Option 3: Carry out a two-phase transition with dual metric and English measurement signs posted by October 1996 and move to metric-only signs at some time in the future. Although most respondents opposed conversion, about 15 percent voted for one of DOT's three options for sign conversion. About 70 percent of the 443 respondents supported option 2, about 27 percent supported option 3, and the remaining 3 percent supported option 1. If FHWA requires conversion and federal funds are available, AASHTO's position is that at least a 2-year lead time is needed to plan the highway sign conversion. After the 2-year lead time, AASHTO proposes that FHWA select a 6-month period for the quick conversion of all highway signs and milepost markers, which is similar to option 2. Furthermore, AASHTO's proposal would require that, during this 6-month period, all signs containing English units (distances, speed limits, clearances, weights, etc.) be modified to equivalent metric units. An official of the American Trucking Association--a lobbying organization for the trucking industry--told us that while it does not have an official position on highway sign conversion, there are safety considerations associated with the conversion options. For example, if all signs are not converted during the same time period, as AASHTO suggests, drivers might be confused when they see a speed limit sign in metric units, then one in English units. FHWA officials told us that, in implementing sign conversion, they hope to minimize the driving public's confusion and safety concerns by suggesting ways that states can call attention to the new metric signs. While no guidelines have been completed, FHWA officials said that one approach they are considering is to put metric units in yellow to differentiate them from the English unit signs drivers are used to. For any option, the American Trucking Association official told us that without a nationwide educational process before the conversion occurs, commercial truck drivers and the general driving public may not be familiar with metric units. This lack of education could result in safety concerns related to speed and also clearance heights on bridges and tunnels. Alabama has begun to convert its highway signs. In a manner similar to FHWA's option 1, Alabama is replacing highway signs with metric signs through routine maintenance and for other reasons such as construction. However, Alabama plans, unlike option 1, to put an English measure overlay on the signs. Under this approach, the state believes that it will save money because the signs need to be replaced anyway, and since signs and overlays are fabricated in the state's shop, all the overlays could be made now and would not be affected by the cost of future inflation. Moreover, unlike FHWA's option 1, this approach would also allow for the signs to be changed to metric concurrently over the same short period as overlays are removed or metric unit overlays are added for those English-unit signs that had not been replaced during maintenance. One open question concerning Alabama's approach is whether the state will remove the overlays and convert to metric if FHWA decides not to require conversion. From a safety standpoint, it may not be prudent for one state to convert and the surrounding states to keep their signs in English units. FHWA officials said that they had not decided on a course of action if conversion were not mandatory and some states converted and others did not. FHWA has not estimated the nationwide costs of highway sign conversions. However, on the basis of Canada's experience in metric sign conversion as well as the work done to date by Alabama, "ballpark" estimates of about $334 million and $420 million can be calculated. In 1977, the Canadian Ministries changed about 241,000 signs (using overlays) on 300,000 miles of highway, which is about the number of highway miles in California and Texas. The conversion took 2 months and cost about $13.4 million in 1995 U.S. dollars, or $55.70 per sign ($6.1 million or $25.43 per sign in 1977 Canadian dollars). The number of Canadian signs is a fraction of FHWA's estimate that about 6 million signs on the nation's state and local roads would need to be changed. Using Canada's cost data, the United States conversion could cost about $334 million. However, this estimate could vary depending on the length of implementation and the replacement method chosen. In 1993, AASHTO issued its "Guide to Metric Conversion." The guide included a case study on Alabama that used information on the number and types of signs from one area of the state to develop conversion cost estimates. Initially, Alabama estimated that it would cost $2.7 million to convert its state highway signs, using the quick-conversion option, to metric units by October 1995. After the initial estimate, Alabama increased its estimate to $3.8 million (at about $70 per sign), to include an additional $1.1 million to install kilometer markers for data collection purposes.Assuming that nationwide conversion costs would be similar to Alabama's, changing the nation's 6 million highway signs on state and local roads could cost about $420 million. We termed this a ballpark estimate because there are a number of factors that could affect the estimate. For example, the validity of FHWA's estimate of 6 million signs, as well as the mix of signs--large ones, small ones, or milepost markers--could be important in determining costs. Eight of the nine states that we contacted provided very preliminary cost estimates, ranging from a low of $1 million to a high of $20 million, for changing their highway signs on state roads. The difference in estimates depends on the method and number of signs for conversion. Because FHWA postponed the conversion, FHWA officials told us that most states have not developed cost estimates. Many states do not have information on the number of signs that they would need to change on local roads or the costs involved. Several state officials noted in the 1993 Federal Register notice that since there are many more miles on local roads than state roads, the sign conversion costs could be quite substantial. According to an FHWA official, about 70 percent (or 2.7 million) of the nation's 3.9 million miles of public roads are classified as local roads. In January 1995, FHWA hired a contractor--Battelle--to develop national cost estimates for each of the three conversion options (and variations of those options) spelled out in the August 31, 1993, notice. To develop national cost estimates, Battelle plans to use information from state and local jurisdictions that have computerized sign inventories. According to an FHWA official, obtaining information at the local level may be difficult because local road sign inventories may not be maintained. If local inventories are not available, Battelle may have to rely on other methodologies, such as statistical sampling techniques, to provide a basis for estimating costs of changing local road signs to metric. The study is just getting started and is scheduled for completion in January 1996. State and local officials, AASHTO, and an American Trucking Association official all said that an important component to highway sign conversion is public education. Without a more comprehensive national conversion effort that would seek to educate all parts of our society on the metric system, FHWA and state DOTs might have to establish and fund an education program before signs are converted. According to AASHTO's 1993 "Guide to Metric Conversion," careful planning and a public information campaign are largely credited for Canada's smooth transition to metric units. The public had been prepared for the conversion through displays of the new signs, full-page newspaper advertisements, radio and TV spots, and informational pamphlets. Moreover, since highway sign conversion was just one part of Canada's overall effort to convert the country to the metric system, the program began with several years of close cooperation and careful planning among government agencies. AASHTO's 1993 guide also states that while public information programs are essential to conversion, a large part of educating the public can be handled better by means other than those at the immediate disposal of the highway agency. The guide points out that the Secretary of Commerce has been given the lead to establish a metric education program, and AASHTO believes that the Subcommittee on Public Education and Awareness, established by the Secretary of Commerce, is a "very appropriate mechanism for conducting a national awareness campaign." However, our January 1994 report on federal metric conversion activities raises questions about the limited actions that have been taken at the federal level to foster metric education. Furthermore, the report points out that the federal government by itself cannot achieve the goal of metric conversion. The government must depend upon support from its private sector suppliers and from the public; therefore, a national dialogue is critical to defining the next steps in decision-making about a national metric conversion effort. If the federal government, under the leadership of the Department of Commerce, does not actively lead a nationwide conversion education effort, FHWA and state DOTs would be taking the lead in educating the public on the metric system. While FHWA is planning for public awareness and education as part of the sign conversion process, being the lead agency for public awareness out of necessity, rather than being part of an overall national conversion education effort, is a very different matter. However, unless FHWA and the state DOTs take the lead, it will be difficult for the driving public to become educated or, at a minimum, aware of the differences between metric and English highway signs. However, FHWA has not required Battelle to determine the cost of educating the driving public under each option. The Congress designated the metric system as the preferred measurement system in 1988; however, it passed appropriations legislation in 1994 and 1995 that prohibited federal funding of converting highway signs to metric units. As a result, FHWA has postponed requiring states to implement the conversion. The majority of comments on FHWA's conversion options opposed conversion because of the costs. While implementation is on hold, FHWA has an opportunity to revisit the safety and cost implications of highway sign conversion to metric units. Battelle's cost study could provide the information needed for such an assessment. Canada's experience and Alabama's estimate provide the basis for developing ballpark national estimates to convert highway signs on state and local roads of $334 million and $420 million, respectively. FHWA has tasked Battelle with developing a more comprehensive, data-driven estimate for various conversion options. However, there is concern that little data may be available to estimate the cost of converting signs on local roads. Moreover, it is unclear who is responsible for metric education and how it will be paid for. To help to ensure that the Federal Highway Administration has sufficient information to analyze the implications of the metric conversion of highway signs, we recommend that the Secretary of Transportation direct the Administrator, Federal Highway Administration, to expand the national cost estimate study to include the potential costs of educating the public about converting highway signs to metric units. We met with the Chiefs of the Contract Administration and Technical Development Branches, FHWA, and the Assistant for Energy Policy from the Office of the Secretary to obtain their views on a draft of this report. FHWA disagreed with our proposed recommendation that it expand Battelle's cost estimate study to include potential education costs for sign conversion. FHWA said that it intends to play a role in metric education and that the states could use the material that it develops or build on those materials with an educational plan of their own. Since it is uncertain how education will be handled or how much it will cost nationwide, we continue to believe that developing such an estimate will help to ensure that the cost estimates developed by Battelle will include all potential costs of conversion. To evaluate the status and costs of converting the nation's highway signs to metric units, we interviewed responsible officials from FHWA, Ontario's Ministry of Transportation, the Transportation Association of Canada, the Transportation Research Board, and AASHTO. We also discussed highway sign conversion and its cost with officials from nine state highway departments--Alabama, Colorado, Florida, Georgia, Illinois, Indiana, North Carolina, Tennessee, and Virginia. These states were identified by FHWA as being the furthest along with metric signage and could provide a range of cost estimates for converting highway signs to metric units. We also reviewed the laws and regulations pertinent to metric signage, such as the Metric Conversion Act, as amended; FHWA's Metric Conversion plan; Federal Register notices; and DOT's appropriations bills for fiscal years 1994 and 1995. We conducted our review between October 1994 and April 1995 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 7 days after the date of this letter. At that time, we will send copies to interested congressional committees; the Secretary of Transportation; the Administrator, Federal Highway Administration; and the Director, Office of Management and Budget. We will also make copies available to others upon request. If you have any questions concerning this report, I can be reached at (202) 512-2834. Major contributors to this report are listed in appendix I. Gary L. Jones Susan A. Fleming Katherine Chenault The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO provided information on the Federal Highway Administration's (FHwA) metric conversion plan, focusing on the: (1) status of federal and states' efforts to convert highway signs to metric units; and (2) possible costs involved in implementing the conversion. GAO found that: (1) in June 1994, FHwA announced that it was postponing the deadline for converting highway signs until at least after 1996 and as a result, most states have deferred their sign conversion activities; (2) FHwA postponed the conversion because recent legislative requirements have prohibited the use of federal-aid highway funds for this activity, and it received negative comments regarding the costs of the conversion; (3) since sign conversion remains a goal, FHwA is continuing with activities to support conversion, such as converting its manual on highway signs into English and metric units; (4) there is no comprehensive estimate of the costs to convert highway signs to metric units, but Alabama has determined that it would cost about $420 million to convert the signs in state and local roads; and (5) an FHwA contractor will be developing a comprehensive estimate, but there is concern that little data are available to estimate sign conversions on local roads, since inventories of local signs may not exist.
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JSF restructuring continued throughout 2011 and into 2012 with additional costs and extended schedules incurred for key activities and decisions. The Department's actions have helped reduce near term risks by lowering annual procurement quantities and allowing more time for flight testing. The Department is expected to soon approve a new acquisition program baseline that will likely make further changes in cost and schedule. This decision, critical for program management and oversight, has been delayed several times and it has now been 2 years since the Department announced that the JSF program had breached the and that a new baseline would critical cost growth statutory thresholdsbe established. Table 1 tracks historical changes in cost, schedule, and quantities since the start of development (2001), a major redesign (2004), a new baseline following the program's Nunn-McCurdy breach of the significant cost growth statutory threshold (2007), initial restructuring actions after the second Nunn-McCurdy breach (2010), and an interim DOD cost estimate (2011). The interim total program cost estimate increased about $15 billion since the June 2010 estimate included in the Nunn-McCurdy certification, about $5 billion for development and $10 billion for procurement. Compared to the current approved baseline set in 2007, total costs have increased about $119 billion, unit procurement costs have risen more than 40 percent, and the start of full-rate production has been delayed 5 years. The department anticipates releasing its new cost and schedule estimates within the next few weeks. Department officials have indicated that the new figures will not be significantly different from the June 2011 interim estimate. Initial operational capability dates for the Air Force, Navy and Marine Corps--the critical dates when the warfighter expects the capability promised by the acquisition program to be available--have been delayed over time and are now unsettled. Until greater clarity is provided on the program's path forward, the military services are likely to wait to commit to new initial operational capability dates. Concerned about concurrency risks, in February 2012, DOD reduced planned procurement quantities through fiscal year 2017 by 179 aircraft. This marked the third time in 3 years that near-term quantities were cut; combined with other changes since 2008, total JSF procurement quantity has been reduced by 410 aircraft through fiscal year 2017. Since the department still plans to eventually acquire the full complement of U.S. aircraft--2,443 procurement jets--the procurement costs, fielding schedules, and support requirements for the deferred aircraft will be incurred in future years beyond 2017. Figure 1 shows how planned quantities in the near-term have steadily declined over time. With the latest reduction, the program now plans to procure a total of 365 aircraft through 2017, about one-fourth of the 1,591 aircraft expected in the 2002 plan. Slowing down procurement plans reduces concurrency risks to a degree, but overall program affordability--both in terms of the investment costs to acquire the JSF and the continuing costs to operate and maintain it over the life-cycle--remains a major risk. The long-stated intent that the JSF program would deliver an affordable, highly common fifth generation aircraft that could be acquired in large numbers could be in question. As the JSF program moves forward, unprecedented levels of funding will be required during a period of more constrained defense funding expectations overall. As shown in figure 2, the JSF annual funding requirements average more than $13 billion through 2035, and approach $16 billion annually for an extended period. The Air Force alone needs to budget from $8 to $11 billion per year from fiscal year 2016 through 2035 for procurement. At the same time, the Air Force is committed to other big-dollar projects such as the KC-46 tanker and a new bomber program. Much of the instability in the JSF program has been and continues to be the result of highly concurrent development, testing, and production activities. During 2011, overall performance was mixed as the program achieved 6 of 11 primary objectives for the year. Developmental flight testing has recently gained momentum, but has a long road ahead with testing of the most complex software and advanced capabilities still in the future. JSF software development is one of the largest and most complex projects in DOD history, providing essential capability, but software has grown in size and complexity, and is taking longer to complete than expected. Developing, testing, and integrating software, mission systems, and logistics systems are critical for demonstrating the operational effectiveness and suitability of a fully integrated, capable aircraft and pose significant technical risks moving forward. The JSF program achieved 6 of 11 primary objectives it established for 2011. Five of the objectives were specific test and training actions tied to contractual expectations and award fees, according to program officials. The other 6 objectives were associated with cost, schedule, contract negotiations, and sustainment. The program successfully met 2 important test objectives: the Marine Corps' short takeoff and vertical landing (STOVL) variant accomplished sea trials and the Navy's carrier variant (CV) completed static structural testing. Two other test objectives were not met: the carrier variant did not demonstrate shipboard suitability because of problems with the tail hook, which requires redesign, and software was not released to flight test on time. The program also successfully completed objectives related to sustainment design reviews, schedule data, manufacturing processes, and cost control, but did not meet a training deadline or complete contract negotiations. Development flight testing sustained momentum begun in 2010 and met or exceeded most objectives in its modified test plan for 2011. The program accomplished 972 test flights in 2011, more than double the flights in 2010. Flight test points accomplished exceeded the plan, overall as shown in figure 3. The flight test points accomplished on the Air Force's conventional takeoff and landing (CTOL) variant were less than planned, due to operating limitations and aircraft reliability. Even with the progress made in 2011, most development flight testing, including the most challenging, still lies ahead. Through 2011, the flight test program had completed 21 percent of the nearly 60,000 planned flight test points estimated for the entire program. Program officials reported that flight tests to date have largely demonstrated air worthiness, flying qualities, speed, altitude, and maneuvering performance requirements. According to JSF test officials, the more complex testing such as low altitude flight operations, weapons and mission systems integration, and high angle of attack has yet to be done for any variant and may result in new discoveries. Initial development flight tests of a fully integrated, capable JSF aircraft to demonstrate full mission systems capabilities, weapons delivery, and autonomic logistics is now expected in 2015 at the earliest. This will be critical for verifying that the JSF aircraft will work as intended and for demonstrating that the design is not likely to need costly changes. Like other major weapon system acquisitions, the JSF will be susceptible to discovering costly problems later in development when the more complex software and advanced capabilities are integrated and flight tested. With most development flight testing still to go, the program can expect more changes to aircraft design and continued alterations of manufacturing processes. The STOVL variant performed better than expected in flight tests during 2011. It increased flight test rates and STOVL-specific mode testing, surpassing planned test point progress for the year. Following reliability problems and performance issues, the Secretary of Defense in January 2011 had placed the STOVL on "probation" for two years, citing technical issues unique to the variant that would add to the aircraft's cost and weight. The probation limited the U.S. STOVL procurement to three aircraft in fiscal year 2011 and six aircraft in fiscal year 2012 and decoupled STOVL testing from CV and CTOL testing so as not to delay those variants. While no specific exit criteria was defined, the two year probation was expected to provide enough time to address STOVL- specific technical issues, engineer solutions, and assess their impact. In January 2012, the Secretary of Defense lifted the STOVL probation after one year, citing improved performance and completion of the initial sea trials as a basis for the decision. The Department concluded that STOVL development, test, and product maturity is now comparable to the other two variants. While several technical issues have been addressed and some potential solutions engineered, assessing whether the deficiencies are resolved is ongoing and, in some cases, will not be known for years. According to the program office, two of the five specific problems cited are considered to be fixed while the other three have temporary fixes in place. The Director, Operational Test and Evaluation reported that significant work remains to verify and incorporate modifications to correct known STOVL deficiencies and prepare the system for operational use. Until the proposed technical solutions have been fully tested and demonstrated, it cannot be determined if the technical problems have been resolved. Software providing essential JSF capability has grown in size and complexity, and is taking longer to complete than expected. Late releases of software have delayed testing and training, and added costs. Software defects, low productivity, and concurrent development of successive blocks have created inefficiencies, taking longer to fix defects and delaying the demonstration of critical capabilities. The program has modified the software development and integration schedule several times, in each instance lengthening the time needed to complete work. In attempting to maintain schedule, the program has deferred some capabilities to later blocks. Deferring tasks to later phases of development adds more pressure and costs to future efforts and likely increases the probability of defects being realized later in the program, when the more complex capabilities in these later blocks are already expected to be a substantial technical challenge. The lines of code necessary for the JSF's capabilities have now grown to over 24 million--9.5 million on board the aircraft. By comparison, JSF has about 3 times more on-board software lines of code than the F-22A Raptor and 6 times more than the F/A-18 E/F Super Hornet. This has added work and increased the overall complexity of the effort. The software on-board the aircraft and needed for operations has grown 37 percent since the critical design review in 2005. While software growth appears to be moderating, contractor officials report that almost half of the on-board software has yet to complete integration and test--typically the most challenging phase of software development. JSF software growth is not much different than other recent defense acquisitions which have experienced from 30 to 100 percent growth in software code over time. However, the sheer number of lines of code for the JSF makes the growth a notable cost and schedule challenge. JSF's mission systemsoperational and support capabilities expected by the warfighter, but the hardware and software for these systems are immature and unproven at this time. Only 4 percent of mission systems requirements have been verified and significant learning and development remains before the program can demonstrate mature software and hardware. The program and logistics systems are critical to realizing the has experienced significant technical challenges developing and integrating mission and logistics systems software and hardware, including problems with the radar, integrated processor, communication and navigation equipment, and electronic warfare capabilities. Problems with the helmet mounted display may pose the greatest risk. The helmet is integral to fusing and displaying sensor and weapons employment data, providing situational awareness, and reducing pilot workload. Helmet shortfalls-including night vision capability, display jitter (varying image), and latency (or delay) in transmitting data-could limit capability or change operational concepts. DOD is pursuing a dual path by funding a less-capable alternate helmet as a back-up; this development effort will cost more than $80 million. The selected helmet will not be integrated with the baseline aircraft until 2014 or later, increasing the risks of a major system redesign, retrofits of already built aircraft, or changes in concepts of operation. The Autonomic Logistics Information System (ALIS) is a ground system essential to managing and streamlining logistics and maintenance functions and for controlling life-cycle operating and support costs. ALIS is also not mature and may require some design changes to address known deficiencies. ALIS is in limited operations at test and training sites and officials are evaluating proposed solutions. While additional development time and resources may resolve some deficiencies, several requirements are not going to be met given current schedules, according to the JSF test team report. Initial dedicated operational testing of a fully integrated JSF is tentatively scheduled to begin in 2017. Operational testing is important for evaluating the warfighting effectiveness and suitability of the JSF, and successfully completing initial operational testing is required to support the full rate production decision, now expected in 2019. Operational testers assessed progress of JSF development testing and its readiness for operational testing, and concluded that the program was not on track to meet operational effectiveness or suitability requirements. The test team's October 2011 report identified deficiencies with the helmet mounted display, night vision capability, aircraft handling characteristics, and shortfalls in maneuvering performance. The report also cited an inadequate logistics system for deployments, excessive time to repair and restore low observable features, low reliability, and poor maintainability performance. It also stated that the JSF will require substantial improvements in order to achieve sortie generation rates and life cycle cost requirements. The program has not yet demonstrated a stable design and manufacturing processes capable of efficient production. Engineering changes are persisting at relatively high rates and additional changes will be needed as testing continues. Manufacturing processes and performance indicators show some progress, but performance on the first four low-rate initial production contracts has not been good. All four have experienced cost overruns and late aircraft deliveries. In addition, the government is also incurring substantial additional costs to retrofit produced aircraft to correct deficiencies discovered in testing. Until manufacturing processes are in control and engineering design changes resulting from information gained during developmental testing are reduced, there is risk of more cost growth. Actions the Department has taken to restructure the program have helped, but remaining concurrency between flight testing and production continues to put cost and schedule at risk. Even with the substantial reductions in near-term procurement quantities, DOD is still investing billions of dollars on hundreds of aircraft while flight testing has years to go. As was the experience with building the development test aircraft, manufacturing the procurement aircraft is costing more and taking longer than planned. Cost overruns and delivery slips are two indicators that manufacturing processes, worker efficiency, quality control, and supplier performance are not yet sufficiently capable to handle the volume of work scheduled. Cost overruns on each of the first four annual procurement contracts are projected to total about $1 billion (see table 2). According to program documentation, through the cost sharing provisions in these contracts, the government's share of the total overrun is about $672 million. On average, the government is paying an additional $11 million for the 63 aircraft on under contract (58 are U.S. aircraft and 5 are for international partners). There is risk of additional cost overruns because all work is not completed. Defense officials reduced the buy quantity in the fifth annual procurement contract to help fund these cost overruns and additional retrofit costs to fix deficiencies discovered in testing. While Lockheed Martin, the prime contractor, is demonstrating somewhat better throughput capacity and showing improved performance indicators, the lingering effects of critical parts shortages, out of station work, and quality issues continue to be key cost and schedule drivers on the first four production lots. Design modifications to address deficiencies discovered in testing, incorporation of bulkhead and wing process improvements, and production of the first carrier variant further impacted manufacturing during 2011. Lockheed had expected to deliver 30 procurement aircraft by the end of 2011 but delivered only nine procurement aircraft. Each was delivered more than 1 year late. The manufacturing effort still has thousands of aircraft planned for production over the next 25 years and the rate of production is expected to increase substantially starting in 2015. This will make it vital that the contractor achieve an efficient manufacturing process. Pratt & Whitney, the engine manufacturer, had delivered 42 production engines and 12 lift fans at the time of our review. system, the propulsion system is still under development working to complete testing and fix deficiencies while concurrently delivering engines under the initial procurement contracts. The program office's estimated cost for the system development and demonstration of the engine has increased by 75 percent, from $4.8 billion to $8.4 billion, since the start of development. Engine deliveries continue to miss expected contract due dates but still met aircraft need dates because of longer slips in aircraft Like the aircraft production. Supplier performance problems and design changes are driving cost increases and late engines. Lift fan system components and processes are driving the major share of cost and schedule problems. Going forward, Lockheed Martin's ability to manage its expanding global supplier network is fundamental to meeting production rates and throughput expectations. DOD's Independent Manufacturing Review Team earlier identified global supply chain management as the most critical challenge for meeting production expectations. The cooperative aspect of the supply chain provides both benefits and challenges. The international program structure is based on a complex set of relationships involving both government and industry from the United States and eight other countries. Overseas suppliers are playing a major and increasing role in JSF manufacturing and logistics. For example, center fuselage and wings will be manufactured by Turkish and Italian suppliers, respectively, as second sources. In addition to ongoing supplier challenges-parts shortages, failed parts, and late deliveries- incorporating international suppliers presents additional challenges. In addition, the program must deal with exchange rate fluctuations, disagreements over work shares, technology transfer concerns, different accounting methods, and transportation requirements that have already caused some delays. Also, suppliers have sometimes struggled to develop critical and complex parts while others have had problems with limited production capacity. Lockheed Martin has implemented a stricter supplier assessment program to help manage supplier performance. We and several defense offices cautioned the Department years ago about the risks posed by the extremely high degree of concurrency, or overlap, among the JSF development, testing, and production activities.To date, the Government has incurred an estimated $373 million in retrofit costs on already-built aircraft to correct deficiencies discovered in development testing. This is in addition to the $672 million for the government's share of contract cost overruns. The program office projects additional retrofit costs through lot 10, but at decreasing amounts. Questions about who will pay for additional retrofit costs under the planned fixed price contracts-the contractor or the government-and how much, have delayed final contract negotiations on the fifth lot. Producing aircraft before testing sufficiently demonstrates the design is mature increases the likelihood of future design changes, which drives cost growth, schedule delays, and manufacturing inefficiencies. Design changes needed in one JSF variant could also impact the other two variants, reducing efficiencies necessary to lower production and operational costs with common parts and manufacturing processes for the three variants. While the JSF program's engineering change traffic- the monthly volume of changes made to engineering drawings-is declining, it is still higher than expected for a program entering its sixth year of production. The total number of engineering drawings continues to grow due to design changes, discoveries during ground and flight testing, and other revisions to drawings. Figure 4 tracks design changes over time and shows that changes are expected to persist at an elevated pace through 2019. Defense officials have long acknowledged the substantial concurrency built into the JSF acquisition strategy, but until recently stated that risks were manageable. However, a recent high-level departmental review of JSF concurrency determined that the program is continuing to discover issues at a rate more typical of early design experience, questioning the assumed design maturity that supported the highly concurrent acquisition strategy. DOD's November 2011 report concluded that the "team assesses the current confidence in the design maturity of the F-35 to be lower than one would expect given the quantity of LRIP aircraft procurements planned and the potential cost of reworking these aircraft as new test discoveries are made. This lack of confidence, in conjunction with the concurrency driven consequences of the required fixes, supports serious reconsideration of procurement and production planning." The review identified substantial risk of needed modifications to already produced aircraft as the flight testing enters into more strenuous test activities. Already, as a result of problems found in less strenuous basic airworthiness testing, critical design modifications are being fed back through the production line. For example, the program will be cutting in aircraft modifications to address bulkhead cracks discovered during airframe ground testing and STOVL auxiliary inlet door durability issues. More critical test discoveries are likely as the program moves into the more demanding phases of testing. Restructuring actions by the Department since early 2010 have provided the JSF program with more achievable development and production goals, and has reduced, but not eliminated, risks of additional retrofit costs due to concurrency in current and future lots. The Department has progressively lowered the production ramp-up rate and cut near term procurement quantities; fewer aircraft procured while testing is still ongoing lowers the risk of having to modify already produced aircraft. However, even with the most recent reductions in quantities, the program will still procure a large number of aircraft before system development is complete and flight testing confirms that the aircraft design and performance meets warfighter requirements. Table 3 shows the current plan that will procure 365 aircraft for $69 billion by the end of planned developmental flight tests. Over the last 2 years, the JSF program has undergone extensive restructuring that places it on a more achievable course, albeit a lengthier and more expensive one. At the same time, the near-constant churn (change) in cost, schedule, and performance expectations has hampered oversight and insight into the program, in particular the ability to firmly assess progress and prospects for future success. Going forward, it will be imperative to bring stability to the program and provide a firm understanding of near- and far-term financial requirements so that all parties--the Congress, Defense Department, and international partners-- can reasonably set priorities and make informed decisions amid a tough fiscal environment. The JSF remains the critical centerpiece of DOD's long-term tactical aircraft portfolio. System development of the aircraft and engine ongoing for over a decade, continue to experience significant challenges. The program's strategic framework, laden with concurrency, has proved to be problematic and ultimately, a very costly approach. DOD over the past year has identified substantial cost overruns attributed to relatively poor execution in production and specific concurrency-related inefficiencies. There is risk of future cost growth from test discoveries driving changes to design and manufacturing processes. Effectively managing software and the global supply chain is critical to improving program outcomes, increasing manufacturing throughput, and enabling future expansion of JSF procurement. Chairman Bartlett, Ranking Member Reyes, and members of the House Armed Services Committee, this completes my prepared statement. I would be pleased to respond to any questions you may have. We look forward to continuing to work with the Congress as we finalize our upcoming report with potential new recommendations that will address these issues in more detail. For further information on this statement, please contact Michael Sullivan at (202) 512-4841 or [email protected]. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement are Bruce Fairbairn, Charlie Shivers, LeAnna Parkey, W. Kendal Roberts, Sean Merrill, and Matt Lea. Joint Strike Fighter: Implications of Program Restructuring and Other Recent Developments on Key Aspects of DOD's Prior Alternate Engine Analyses. GAO-11-903R. Washington, D.C.: September 14, 2011. Joint Strike Fighter: Restructuring Places Program on Firmer Footing, but Progress Is Still Lagging. GAO-11-677T. Washington, D.C.: May 19, 2011. Joint Strike Fighter: Restructuring Places Program on Firmer Footing, but Progress Still Lags. GAO-11-325. Washington, D.C.: April 7, 2011. Joint Strike Fighter: Restructuring Should Improve Outcomes, but Progress Is Still Lagging Overall. GAO-11-450T. Washington, D.C.: March 15, 2011. Defense Management: DOD Needs to Monitor and Assess Corrective Actions Resulting from Its Corrosion Study of the F-35 Joint Strike Fighter. GAO-11-171R. Washington D.C.: December 16, 2010. Joint Strike Fighter: Assessment of DOD's Funding Projection for the F136 Alternate Engine. GAO-10-1020R. Washington, D.C.: September 15, 2010. Tactical Aircraft: DOD's Ability to Meet Future Requirements is Uncertain, with Key Analyses Needed to Inform Upcoming Investment Decisions. GAO-10-789. Washington, D.C.: July 29, 2010. Joint Strike Fighter: Significant Challenges and Decisions Ahead. GAO-10-478T. Washington, D.C.: March 24, 2010. Joint Strike Fighter: Additional Costs and Delays Risk Not Meeting Warfighter Requirements on Time. GAO-10-382. Washington, D.C.: March 19, 2010. Joint Strike Fighter: Significant Challenges Remain as DOD Restructures Program. GAO-10-520T. Washington, D.C.: March 11, 2010. Joint Strike Fighter: Strong Risk Management Essential as Program Enters Most Challenging Phase. GAO-09-711T. Washington, D.C.: May 20, 2009. Joint Strike Fighter: Accelerating Procurement before Completing Development Increases the Government's Financial Risk. GAO-09-303. Washington D.C.: March 12, 2009. Joint Strike Fighter: Impact of Recent Decisions on Program Risks. GAO-08-569T. Washington, D.C.: March 11, 2008. Joint Strike Fighter: Recent Decisions by DOD Add to Program Risks. GAO-08-388. Washington, D.C.: March 11, 2008. Tactical Aircraft: DOD Needs a Joint and Integrated Investment Strategy. GAO-07-415. Washington, D.C.: April 2, 2007. Defense Acquisitions: Analysis of Costs for the Joint Strike Fighter Engine Program. GAO-07-656T. Washington, D.C.: March 22, 2007. Joint Strike Fighter: Progress Made and Challenges Remain. GAO-07-360. Washington, D.C.: March 15, 2007. Tactical Aircraft: DOD's Cancellation of the Joint Strike Fighter Alternate Engine Program Was Not Based on a Comprehensive Analysis. GAO-06-717R. Washington, D.C.: May 22, 2006. Tactical Aircraft: Recapitalization Goals Are Not Supported by Knowledge-Based F-22A and JSF Business Cases. GAO-06-487T. Washington, D.C.: March 16, 2006. Joint Strike Fighter: DOD Plans to Enter Production before Testing Demonstrates Acceptable Performance. GAO-06-356. Washington, D.C.: March 15, 2006. Joint Strike Fighter: Management of the Technology Transfer Process. GAO-06-364. Washington, D.C.: March 14, 2006. Tactical Aircraft: F/A-22 and JSF Acquisition Plans and Implications for Tactical Aircraft Modernization. GAO-05-519T. Washington, D.C: April 6, 2005. Tactical Aircraft: Opportunity to Reduce Risks in the Joint Strike Fighter Program with Different Acquisition Strategy. GAO-05-271. Washington, D.C.: March 15, 2005. 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The F-35 Lightning II, also known as the JSF, is DOD's most costly and ambitious aircraft acquisition, seeking to simultaneously develop and field three aircraft variants for the Air Force, Navy, Marine Corps, and eight international partners. The JSF is critical to DOD's long-term recapitalization plans as it is intended to replace hundreds of legacy aircraft. Total U.S. investment in the JSF is nearing $400 billion to develop and procure 2,457 aircraft over several decades and will require a long-term, sustained funding commitment. In 2010, DOD began to extensively restructure the program to address relatively poor cost, schedule, and performance outcomes. This testimony draws on GAO's extensive body of work on the JSF, including preliminary results from the current annual review mandated in the National Defense Authorization Act for Fiscal Year 2010. This testimony discusses (1) program costs, schedule changes, and affordability issues, (2) performance testing results, software, and technical risks, and (3) procurement contract cost performance, concurrency impacts, manufacturing results, and design changes. GAO's work included analyses of a wide range of program documents and interviews with defense and contractor officials. Joint Strike Fighter (JSF) restructuring continues into a third year, adding to cost and schedule. Since June 2010, the total cost estimate increased about $15 billion, $5 billion for development and $10 billion for procurement. There will likely be additional changes when the Department of Defense (DOD) approves a new program baseline, expected soon. Compared to the current approved baseline from 2007, total costs have increased about $119 billion, full-rate production has been delayed 5 years, and initial operational capability dates are now unsettled because of program uncertainties. While the total number of aircraft the U. S. plans to buy has not changed, DOD has for 3 straight years reduced near-term procurement quantities, deferring aircraft and costs to future years. Since 2002, the program has reduced aircraft procurement quantities through 2017 by three-fourths, from 1,591 to 365. As the program continues to experience cost growth and delays, projected annual funding needs are unprecedented, averaging more than $13 billion a year through 2035. Most of the instability in the program has been and continues to be the result of highly concurrent development, testing, and production. Overall performance in 2011 was mixed as the program achieved 6 of 11 primary objectives. Developmental flight testing gained momentum and is about one-fifth complete with the most challenging tasks still ahead. The program can expect more changes to aircraft design and manufacturing processes. Performance of the short takeoff and vertical landing variant improved this year and its "probation" period to fix deficiencies was ended early, even though several fixes are temporary and untested. Management and development of the more than 24 million lines of software code continue to be of concern and late software releases have delayed testing and training. Development of the critical mission systems that give the JSF its core combat capabilities remains behind schedule and risky. To date, only 4 percent of the mission system requirements for full capability has been verified. Testing of a fully integrated JSF aircraft is now expected in 2015 at the earliest. Deficiencies with the helmet mounted display, integral to mission systems functionality and concepts of operation, are most problematic. DOD is funding a less-capable alternate helmet as a back-up. The autonomic logistics information system, a key ground system for improving aircraft availability and lowering support costs, is not yet fully developed. Cost overruns on the first four annual procurement contracts total more than $1 billion and aircraft deliveries are on average more than one year late. Officials said the government's share of the cost growth is $672 million; this adds about $11 million on average to the price of each of the 63 aircraft under those contracts. In addition to the overruns, the government also incurred an estimated $373 million in retrofit costs on produced aircraft to correct deficiencies discovered in testing. The manufacturing process is still absorbing a higher than expected number of engineering changes resulting from flight testing, which makes it difficult to achieve efficient production rates. Until engineering changes are reduced, there are risks of additional cost overruns and retrofit costs. The program now estimates that the number of changes will persist at elevated levels through 2019. Even with the substantial reductions in near-term procurement quantities, DOD is still investing billions of dollars on hundreds of aircraft while flight testing has years to go. GAO has made prior recommendations to help reduce risk and improve outcomes, which DOD has implemented to varying degrees. GAO's forthcoming report will address these in detail along with potential new recommendations.
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Education administers discretionary grants both through competitions and through consideration of unsolicited proposals. In 2003, OII awarded 267 competitive grants totaling $335 million and 41 grants based on unsolicited proposals totaling $64 million. In 2004, the department approved 254 competitive grants for $826 million and 24 grants for unsolicited proposals totaling $17.5 million. Education distributed more than $42 billion in grants in fiscal year 2005, but only a small portion--12 percent--was discretionary. The rest of the funds were allocated to grantees on the basis of statutory formulas or as a result of a congressional earmarks; the department has no discretion over who receives grants from those funds. (See fig. 1). Although Education's grant awards have increased by about a third since before the enactment of the No Child Left Behind Act, funding for discretionary grants decreased by 19 percent. Most of the increase in grant funding is allocated through formula grants, such as Title I--Improving the Academic Achievement of the Disadvantaged. Total funding for formula grants grew by about 45 percent between 2001 and 2005. In the case of competitions, selection of awardees is governed by policies and procedures designed to ensure a fair and objective evaluation of all of the applications. Education begins the competition process by publishing a notice in the Federal Register. This announcement serves as a notice that federal funds are available through a specific program and invites interested parties to prepare an application for funding. The notice provides information on the estimated number of awards that will be made and the estimated size of each award. Importantly, the notice establishes the rules by which the competition will be conducted; among other things, this notice provides information on the eligibility criteria, the issues Education expects the applicants to address in their applications, and the evaluation criteria for the competition. The notice serves as a blueprint for applicants to use in developing a successful application. In addition, program officials must develop a plan for how they will administer the competition. The competition plan, known as an Application Technical Review Plan (ATRP), is a key management control that helps promote fairness and transparency in the process. The competition plan includes such information as the schedule for the competition, the process for identifying and using external peer reviewers, the composition of the peer reviewer panels, a description of how the applications will be assigned to these panels, the process for resolving peer reviewers' conflicts of interest, and the methodology for selecting applications for funding. Any deviation from the original plan for reviewing the applications, selecting applicants, and approving the list of prospective grantees must be justified in writing, which is designed to enhance transparency. Another key control for ensuring fairness in the award process for grants is the peer review process. Peer reviewers are typically external experts who bring an independent assessment of the merits of the applications. The number of individuals selected to serve as peer reviewers depends on the number of applications received for a specific competition. These peer reviewers are usually grouped together in panels of three or more members to review applications. Each peer reviewer independently reads and scores a group of applications randomly assigned to the panel, generally using a numerical scoring system, against program criteria based on legislative and regulatory requirements. Program officials prepare a single score for each application--usually by averaging the scores of all the peer reviewers on the panel that reviewed the application or, less frequently, using a statistical technique to equalize unusual scoring variances among reviewers. Program officials then prepare a rank-ordered list of applications based on the single scores and use this list to prepare their funding recommendations. Education's regulations stipulate that the rank-order list is one of many factors the Secretary may use in selecting new grants. The Secretary may also use information from the application as well as information concerning the applicants' performance and use of funds under a previous award. Ultimately, the peer reviewers' comments are advisory, and the Secretary can determine which new grants to fund based on the program criteria outlined in the statute and the Federal Register notice. In addition to developing the ATRP, Education's policy requires program officials to screen the applicants for eligibility, typically before applications are peer reviewed. Before making an award, program officials must conduct checks to ensure the applicants' competence to manage federal funds. A budget analysis is also required to be conducted to ensure that no grant funds are awarded for unallowable purposes. Education's policy is to award the vast majority of discretionary grant funds through the competitive process, however it may also fund grants based on unsolicited proposals. Although Education can fund unsolicited proposals from any program, the primary source for funding such proposals is the Fund for the Improvement of Education (FIE). This program was created in 1988 as the Secretary's Fund for Innovation in Education. At the time, it provided the Secretary with the authority to fund proposals that showed promise of identifying and disseminating innovative educational approaches. The program has been reauthorized over the years, most recently in 2002 with enactment of the No Child Left Behind Act and maintains flexibility by providing the Secretary with the authority to fund "meritorious" programs to improve the quality of elementary and secondary education at the state and local levels and help all children meet challenging state academic content and student academic achievement standards. The FIE program is also used to fund congressional earmarks for elementary and secondary education activities. The statute does not require Education to compare the relative merits of all the proposals it receives in any given year; however, it does require that the Secretary use a peer review process for reviewing applications. Appropriations for the FIE program remained relatively steady until 1998. Since 1998 appropriations increased dramatically. (See fig. 2). Before funding unsolicited proposals, Education must also make sure that the regulatory requirements for funding such proposals are met. Education must first determine whether the unsolicited proposal could be funded under a competitive grant program; if it could be funded under a competition, the Secretary refers the proposal to the appropriate competition. If an appropriate competition does not exist, departmental regulations require the Secretary to decide if (1) there is a substantial likelihood that the application is of exceptional quality and national significance, (2) the application satisfies the requirements of all applicable statutes and codified regulations that apply to the program, and (3) selection of the project would not have an adverse impact on the funds available for other awards planned for the program. If these criteria are met, Education assembles a panel of experts to evaluate the unsolicited proposal based on the selection criteria. If the experts highly rate the application and determine that the application is of such exceptional quality and national significance that it should be funded as an unsolicited application, then the Secretary may fund the application. Education made progress since 2003 in improving its policies for awarding discretionary grants; however, prior to these improvements we found that Education made exceptions to its policies that benefited the grantees in question. For the two competitive grants, we found that Education officials reduced funding to all of the grantees to accommodate awards to lower-rated grantees and did not conduct analyses to assess the impact of these reductions on the ability of the applicants to achieve the goals of their projects. In doing so, Education broke from established practice by altering its selection methodology after it had developed a list of grantees recommended for funding. With regard to the third grant, which was an unsolicited proposal, we found that Education made the award with approval from only one of three independent reviewers and lacked a process for reconciling differences among peer reviewers' ratings. Furthermore, Education awarded four unsolicited grants in 2001 that had not been recommended for funding by any one of the three reviewers, contrary to departmental regulations. In order to fund a grant to the Arkansas Department of Education, Education officials reduced the prospective grant awards to all other competitors in the 2002 Voluntary Public School Choice Program by nearly 50 percent. Specifically, Education's program office recommended 10 grantees for funding, but subsequently expanded this list to 13 awardees, including 13th-ranked Arkansas. As part of its decision to fund 13 grants instead of 10, Education funded each of the top 12 grantees at just 53 percent of its request, while it funded Arkansas at 77 percent of its request. (See fig. 3). In reducing the grant awards to accommodate 13 grants, Education set aside its policy to conduct a thorough budget analysis of the programmatic impact of the reductions. The program official responsible for the competition received assurances from all of the grantees that they could still achieve the goals of their proposals with decreased funds, and according to this official, all of the grantees submitted revised budgets reflecting reduced award amounts. However, this official told us that Education did not analyze the revised budgets, and we found no evidence from our file review that a budget analysis was conducted to determine if there would be a programmatic impact resulting from the reductions. Additionally, neither the assurances nor the rescoped proposals, which given the magnitude of the reductions could be substantially different from original proposals, were vetted by any external reviewers. For example, Arkansas scaled back its proposal by eliminating foreign language instruction and summer school programs. In addition, we found that Education broke from established practice and altered its selection methodology outlined in the competition plan. The department's original list of 13 grantees would have required cutting the requests of the applicants other than Arkansas across-the-board by 51 percent in order to fund each applicant. Arkansas received a reduction of only 23 percent. The department altered its selection methodology, which resulted in one grant request for $3.6 million being replaced by one for $749,000. Using the new methodology, funding reductions for each of the 12 grantees went from 51 percent to 47 percent. Officials told us it was not normal procedure to make changes to the selection methodology so close to the time of the award decision. We found that the process used by senior departmental officials in making an award to America's Charter School Finance Corporation under the Credit Enhancement for Charter School Facilities program set aside departmental policy and varied from standard departmental practice. Specifically, after receiving a list of four grantees recommended for funding, the deputy secretary asked his staff--a senior political appointee--to re-review the fifth and sixth ranked competitors, as ranked by expert reviewers. Based on this re-review, the order of the fifth and sixth ranked grantees was reversed, according to the department official conducting this review, because "the application from America's Charter was stronger and had been evaluated too harshly by its peer review panel." Program officials said that they had never before experienced a case whereby a senior political appointee selectively re-reviewed and rescored particular applicants after the peer review process had been completed. Furthermore, the appointee recommended that "this excellent, ambitious application be awarded the fifth of five allowable grants," expanding the initial list recommended by the program staff. To fund five grantees, program officials reduced the awards to each of the grantees by anywhere from 16 to 40 percent. We found no evidence that a budget analysis was conducted, as required by policy, to determine whether the reductions impeded the grantee's ability to perform the proposed activities and achieve the intended outcomes on which the reviewers based their scores. In the case of the grant to NCTQ in 2001, Education awarded $5 million to the council, despite the fact that its proposal was not recommended for funding by two of three reviewers. The council's award was based on an unsolicited proposal to create a new national accreditation program for teachers--the American Board for Certification of Teacher Excellence (ABCTE). We also found that in 2001 Education funded eight other unsolicited proposals that had been rejected by at least two of three reviewers. Four of these eight were funded despite not being recommended by any of the three reviewers, which was contrary to departmental regulations. In 2003, Education strengthened some of its policies governing the competitive grant process and in both 2003 and 2004 generally adhered to its key policies, although certain procedures were not always carried out or documented. In our review of all 25 competitions we did not find evidence that Education made funding reductions without conducting budget analyses of the potential impact on the proposals or rescored applications after they had been assessed by expert reviewers. Nor did we encounter any changes to the competition plans for 2003 and 2004 after peer reviewers had assessed the applications. However, we did find found that many of the original competition plans we examined had not been finalized--that is to say, formally approved. For this reason, we cannot be certain that all competitions had proceeded without alteration to the plans. In addition, we found many of the grant files lacked documentation documented evidence that Education had conducted three standard procedures for screening potential grantees: (1) a review of the applicant's compliance with audit requirements; (2) a review of the applicant's eligibility for the program; and (3) a review of requested costs and expenses to determine whether they were allowable. In 2003, Education added certain controls over the competitive grants process aimed at increasing its fairness and transparency. Among these is an explicit requirement to document any changes to a competition plan, which would include changes to how competitors are scored or how peer reviewers are selected. The new guidance provides that if there is a need to deviate from a plan during a competition, it should be formally amended and a written justification should be approved by a senior departmental official and included in the official file for the competition. Also, the department clarified the conditions under which it may reduce funding from what was applied for. In addition, the department added several checks for program staff to consider before making awards as part of their responsibility for determining that potential awardees are competent to manage federal funds. One of these checks requires that program staff submit for screening a list of the likely awardees to determine whether any have a grant history and met auditing requirements. If the audit record reveals any problem, program staff are required to withhold or delay an award until such problems are resolved. Table 1 compares certain requirements from Education's 1997 guidance with 2003 guidance. In our review of all 25 competitions run by OII in 2003 and 2004, we found that Education generally adhered to its policies for ensuring fairness in the competitive process, and we found no evidence that Education made funding reductions without conducting budgetary analysis of the potential impact on the proposals. Nor did we find any instances in which Education officials re-reviewed peer reviewers' initial assessments. In addition, we found that grants were generally awarded to the highest- scoring eligible applicants, as policy requires, and that exceptions to the rank order were appropriately documented and justified, as policy requires. For example, we found several instances where applicants were dropped from the slate because they were ineligible for the program. In 2003 and 2004 we found no evidence that competition plans--the procedural and scoring blueprint for each grant competition and a key management control--were changed after the expert reviews were completed. However, only 5 of the 14 plans covering the 25 competitions had been finalized as required. Specifically, the plans did not contain documentation of approval by a principal officer, nor did the plans show whether they had been amended. Without such documentation, we could not determine whether changes had, in fact, been made to the plans that would have required justification and approval under Education's 2003 guidance. Officials acknowledged that competition plans should be signed and dated when they are developed, but officials said they at times overlooked this step. Additionally, they said that any amendments to the plans were rare and usually not substantive in nature. Further, our review of the 2003 and 2004 grants showed that the files frequently lacked documentation that Education had conducted three management controls that are designed to ensure that applicants are qualified to receive federal funds. Specifically, many of the files did not contain evidence that Education determined whether the applicant had any past audit findings, met the eligibility requirements for the program, or requested any unallowable expenses. We estimate that in 98 percent of the files, there was no evidence that program officers checked a grantee's audit history--a key check on an applicant's ability to manage federal grant funds. The guidance requires program staff to submit lists of potential applicants to the audit administrator to determine whether applicants submitted federally required audits and, if applicable, adhered to corrective actions required in the audits. The director of the audit division informed us, however, that this check was not universally implemented due to resource constraints. As a result, there is no pre- award assessment of an applicant's prior performance under any previous federal grant, or that an applicant with audit findings resolved any deficiencies before a new grant was awarded. Further, we estimate that 45 percent of the grant files did not contain documentation that Education, prior to award, screened the applicants for eligibility, and 68 percent of the grant files did not contain documentation of a thorough analysis of the applicant's requested budget to determine whether all costs were allowable. Program officials assured us that they perform both of these checks and acknowledged that documentation of the checks should be in the file. While Education has taken steps to centralize and improve its process for reviewing unsolicited proposals, it based its screening decisions on proposals that varied greatly and frequently provided extensive technical assistance. Prior to a departmental reorganization, Education officials told us there was no established process for considering unsolicited applications; instead, various offices within Education ushered select applications through a peer review process, and the Secretary decided among those which to fund. In December 2002, the Secretary notified the various offices within the department to send any unsolicited proposals relating to elementary and secondary education initiatives to OII for review. In 2003, OII developed a process for reviewing unsolicited proposals to determine which would be asked to submit an application for peer review. To select among the proposals received, senior OII officials told us they chose those proposals that aligned with the Secretary's priorities. At the beginning of the year, these officials said they met with the Secretary to discuss his priorities and then, over the course of the year, selected some that matched the Secretary's priorities to submit full applications. In 2004, Education's IG reviewed OII's process to ensure that it complied with departmental regulations and policy and found that it failed to document compliance with a number of regulatory requirements. Specifically, the IG reported that Education was not documenting whether unsolicited proposals that had been selected for peer review had been screened to ensure, among other things, that there was a substantial likelihood that the application was of exceptional quality and national significance, as required by regulations. In response to the IG's findings, OII began to document the required screenings by including a memo in the grant file for each proposal that it planned to forward to peer review certifying, among other things, that there was a substantial likelihood that peer reviewers would deem the proposal to be of exceptional quality and national significance. While Education developed a standard process for reviewing unsolicited proposals, these proposals varied greatly in content and detail. OII officials said that the proposals could range from multipage documents from experienced grantees to less formal proposals--sometimes one-page letters or e-mails--from novice grantees. OII does not require that proposals be in a standard format before it selects which ones to forward to peer reviewers. OII officials told us it was often difficult to discern from the submitted material which proposals would ultimately gain the support of the peer reviewers. Nonetheless, OII made its determinations that proposals were likely to meet regulatory requirements of national significance and exceptional quality on the basis of these varying proposals. OII officials said that because the regulatory criteria defining significance and quality are broad many of the proposals submitted during the year met the criteria. OII officials said that they were concerned that if they had to promulgate rules governing the format or topics for unsolicited proposals, they might be overwhelmed with applicants. However, another office within Education--the Institute of Education Sciences (IES)--invites unsolicited research proposals and requires a standard submission. IES' invitation provides guidance on standardized presentation formats--proposals are limited to six pages--and imposes deadlines on submitting the proposals to IES. We also found that OII provided extensive technical assistance to some applicants. Our file review of unsolicited proposals showed that in many cases OII staff were in regular communication with the applicants, provided them with suggestions for how to organize and structure the narrative portion of their applications, assisted them in preparing proposed budgets, and commented on drafts of their applications. In 2003, despite Education's screening and technical assistance efforts, peer reviewers gave low scores to 14 of 42 applicants, and Education funded 13 of these low-scoring proposals. (See appendix II for a list of grants awarded in 2003 based on unsolicited proposals). In its 2004 study, the IG found that OII failed to comply with regulations that make funding for unsolicited proposals contingent on recommendations from peer reviewers. In response to the IG's findings and to comply with the regulation, OII began, in 2004, to ask the peer reviewers to provide recommendations for or against funding, rather than just having them provide a numerical score for each proposal. However, in 2004, if peer review failed to recommend approving a proposal that OII had selected, OII provided the applicants with the reviewers' comments and asked them to rewrite their proposals. In 2004, 10 of the 27 applicants failed to garner the reviewers' support. Of those 10 grantees, 2 declined to resubmit their applications--citing time constraints--and were not approved. The remaining eight applicants revised their proposals and were subsequently recommended for approval by peer reviewers after the revisions were submitted. All eight were approved and funded. (See app. III for a list of grants awarded in 2004 based on unsolicited proposals). The Department of Education has the responsibility to ensure that when it makes discretionary grant awards it follows a transparent and fair process that results in awards to deserving eligible applicants. In the case of unsolicited applications, OII's process is designed to meet statutory and regulatory requirements. However, Education based its decisions about the likely national significance and quality of proposals on information that varied greatly in detail and, as a result, sent applications forward for peer review that sometimes required extensive revisions. Without requiring a more uniform format for unsolicited proposals, OII may not have adequate information on which to base its screening decisions. Regarding its competitive awards process, the department has put in place management controls that, if followed, provide a reasonable assurance that awards are made appropriately. These controls protect the integrity and transparency of the departmental grant award process by requiring, among other things, that competition plans are finalized prior to the competition, that any changes to such plans are documented and approved, that grantees are screened for competency and eligibility, and that departmental officials determine that proposed activities are allowable under the law. When the department does not consistently follow these procedures, as we found to be the case, the integrity of its competitive grant award process may be undermined. Furthermore, in the absence of such diligence, actions taken that benefit specific grantees, such as those we found in 2001 and 2002, could happen again. We are making four recommendations to the Secretary of Education to address certain shortcomings in the department's grant-making policies through a variety of executive actions designed to promote fairness, enhance transparency, and provide greater access to funding opportunities. Specifically, to improve the process for selecting and awarding grants based on unsolicited proposals, we are recommending that the Secretary develop a more systematic format to select unsolicited proposals for further consideration by peer reviewers. In addition, to ensure fairness and improve transparency in the competitive grants process, we recommend that the Secretary take the following steps: Ensure that all competition plans are finalized before competitions begin and if a plan needs to be amended during a competition, the Secretary should provide assurances that any such amendment is justified in writing and has been approved by a senior department official. Implement departmental policy to screen all applicants for compliance with audit requirements before the award, and ensure that outstanding audit issues--if there are any--are addressed before making an award. Take appropriate steps to ensure that program officers better document required checks such as budget analyses and eligibility screening. Education provided us with comments on a draft of this report; these comments appear in appendix III. Education also provided technical comments that we incorporated as appropriate. Education agreed with 3 of our recommendations for improving the transparency of its competitive review process and said it has already taken steps to improve its guidance and training. Specifically, it agreed to (1) finalize competition plans before the competitions begin and obtain approvals from senior department officials for any amendments to the plans, (2) ensure that program officers better document their analyses of applicants' budgets and eligibility, and (3) implement departmental policy to screen all applicants for compliance with audit requirements before awarding any new grants. Education disagreed with our recommendation that it develop a more systematic approach--modeled after the approach used by IES--to select unsolicited proposals for further consideration by peer reviewers. Education said implementation of our recommendation would not help it to select high-quality applications because of the broad nature of the FIE program. We disagree and think that collecting some systematic information would enhance Education's ability to more effectively screen the quality of its applicants and enhance the transparency and consistency of this process. As we reported, Education officials acknowledge that, due to the nature of the proposals, it is often difficult to make quality screening decisions. We acknowledge that FIE awards and IES' research grants are fundamentally different, but we point out that the FIE program does not necessarily need to collect information that is as detailed or that would place unnecessary burdens on organizations seeking FIE funds. To make it clear that Education should focus on developing a systematic approach to selecting unsolicited proposals rather than duplicating the approach used by IES, we have modified our recommendation and removed reference to IES. As agreed with your staff, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to the Secretary of Education, Education's OII, relevant congressional committees, and other interested parties. We will also make copies available to others upon request. In addition, the report will be made available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-7215. Contact points for our Offices of Congressional Relations and Public Affairs are listed on the last page of this report. Key contributors are listed in appendix IV. This appendix discusses in detail our scope and methodology for (1) reviewing Education's grant award decisions for the 2001 and 2002 grants in question to determine whether the department had followed its policies in place at the time, (2) assessing the department's policies and procedures in place in 2003 and 2004 for the competitive awards process and determining whether Education followed them in making such awards in those years, and (3) assessing Education's process for reviewing unsolicited proposals in 2003 and 2004. To review Education's grant award decisions for the 2001 and 2002 grants, we limited our in-depth inquiry to the three grants in question. These grants were awarded before Education reorganized in 2003. In 2003, Education created OII and consolidated a number of grant programs with it. The grants in question were funded from programs that are now housed in OII. In addition, in 2003 Education published revised agency guidance on awarding. This guidance governs the policies and procedures program staff must follow in holding grant competitions and in awarding grants. Consequently, we chose 2003 and 2004 as the time period for our systematic review of both competitive grants and grants based on unsolicited proposals. We used the department's GAPS to identify all grants awarded in 2003 and 2004. We assessed the reliability of the data in GAPS and found it to be reliable for our purposes. We reviewed the competition files from all 25 discretionary grant competitions held in 2003 and 2004. During this 2-year period, a total of 521 grants were awarded. Ten of these grants were for $15 million or more; we selected all of these grants for review. Of the remaining 511 competitive grants awarded for amounts under $15 million, we selected a random sample of 81 additional grants to review. The sample size was calculated to achieve a precision of plus or minus 10 percent for an attribute estimate with an expected proportion of 50 percent and a 95 percent confidence level. With this probability sample, each grant in the population had a known nonzero probability of being selected. Each sample grant was subsequently weighted in the analysis to account statistically for all the members of the population, including those that were not selected. All percentage estimates from this sample have margins of error of plus or minus 10 percent or less. In addition to 91 competitive awards, we examined all 65 grants based on unsolicited proposals made by OII during 2003 and 2004. In 2003, $64 million was awarded to 41 unsolicited grantees; in 2004, $17.5 million was awarded to 24 unsolicited grantees. The grantees we examined were collectively awarded $507 million, or 41 percent of the $1.24 billion total competitive and unsolicited grant funds awarded in 2003 and 2004 by OII. To review the 2001 and 2002 grants in question to determine whether the department had followed its policies, we reviewed departmental grant- making guidance in place at the time these grants were awarded and the official grant files for each of these grants. For the two competitive grants, we also examined the corresponding files for the competitions that contain information on all of the applicants' proposals, the competition plans, and external reviewers' rankings and comments. In addition, for the competitions, we interviewed relevant managers and program officers responsible for monitoring the grants, program attorneys, and ethics officials. For the unsolicited grant, we reviewed the official grant file, including the peer review comments. For comparison, we also reviewed the expert reviewers' rankings and comments for all other unsolicited awards made in 2001. Further, we interviewed program officials responsible for monitoring the grant. To assess the department's policies and procedures in place in 2003 and 2004 for the competitive awards process and determine whether Education followed them in making such awards in those years, we examined departmental guidance issued in March 2003 that governed the grants awarded in those years as well as applicable statutes authorizing competitions and regulations. Also, we reviewed competition files and individual grant files for grants awarded during this 2-year period. In reviewing the competition files, we recorded information in the Federal Register notice inviting applications, the competition plan, the funding memo and slate from the Deputy Under Secretary to the Executive Secretary and information on the funded grantees from the GAPS. We used a structured instrument to collect information about each grant. In reviewing each individual grant file, we recorded information on the (1) grantee's funding levels, years in the program, and contact information; (2) application processing by Education, including funding checklists, application log screening forms, and budget analysis; (3) peer reviewers' comments and rankings; and (4) single audit database reports. We also interviewed key program officials from three of OII's six program offices to ascertain their familiarity with departmental guidance and to help us better understand how they implemented the department's guidance. Similarly, to assess Education's process for reviewing unsolicited proposals in 2003 and 2004, we reviewed departmental guidance and all 65 files for unsolicited grants awarded by OII in 2003 and 2004. We collected information from this review on the processes used by the department to assess each successful application for its quality and its national significance, the level of technical assistance provided to each successful application, the peer reviewers' comments on each application, and any additional post-review support provided to the awardees. Again, we used a structured instrument to collect information about each grant. In addition, we interviewed officials responsible for administering grants based on unsolicited proposals. We conducted our work between May 2005 and February 2006 in accordance with generally accepted government auditing standards. Appendix II: Grants Awarded Based on Unsolicited Proposals (2003-2004) Colorado Children's Campaign Black Alliance for Educational Options Hispanic Council for Reform and Educational Opportunities National Council of Negro Women, Inc. Corporation for Educational Radio and Television (CERT) Accountability Works, Inc./Education Leaders Council National Alliance of State Science and Mathematics Coalitions Research for Better Schools, Inc. University of Dayton School of Education Center for Education Innovation--Public Education Association National Football Foundation and College Hall of Fame, Inc Alpha Kappa Alpha Sorority, Inc. First & Goal, Inc. Bryon Gordon, Assistant Director, and Bill Keller, Analyst-in-Charge, managed this assignment and made significant contributions to all aspects of this report. Ellen Soltow also made significant contributions, and Jim Ashley, Joel Grossman, and Jerry Sandau aided in this assignment. In addition, Richard Burkard and Jim Rebbe assisted in the legal analysis, and Sue Bernstein assisted in the message and report development. U.S. Department of Education's Use of Fiscal Year Appropriations to Award Multiple Year Grants. B-289801. Washington, D.C.: December 30, 2002. Financial Management: Review of Education's Grantback Account. GAO/AIMD-00-228. Washington, D.C.: August 8, 2000. Education Discretionary Grants: Awards Process Could Benefit From Additional Improvements. GAO/HEHS-00-55. Washington, D.C.: March 30, 2000. Department of Education Grant Award. GAO/HRD-93-8R. Washington, D.C.: December 9, 1992. Grants Management: Additional Actions Needed to Streamline and Simplify Processes. GAO-05-335. Washington, D.C.: April 18, 2005. Grants Management: EPA Needs to Strengthen Efforts to Provide the Public with Complete and Accurate Information on Grant Opportunities. GAO-05-149R. Washington, D.C.: February 3, 2005. Federal Assistance: Grant System Continues to Be Highly Fragmented. GAO-03-718T. Washington, D.C.: April 29, 2003. Welfare Reform: Competitive Grant Selection Requirement for DOT's Job Access Program Was Not Followed. GAO-02-213. Washington, D.C.: December 7, 2001. Grant Financial System Requirements: Checklist for Reviewing Systems Under the Federal Financial Management Improvement Act. GAO-01-911G. Washington, D.C.: September 3, 2001. Grant Financial System Requirements. GAO/JFMIP-SR-00-3. Washington, D.C.: June 1, 2000.
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In the past 3 years, Education awarded an average of $4.8 billion annually in discretionary grants through its competitive awards process and through consideration of unsolicited proposals. GAO assessed Education's policies and procedures for both competitive awards and unsolicited proposals awarded by its Office of Innovation and Improvement in 2003 and 2004 and determined whether it followed them in awarding grants in those years. GAO also reviewed Education's grant award decisions for several 2001 and 2002 grants to determine whether the department followed its own policies. In 2003 and 2004, Education took steps to improve its procedures for awarding discretionary grants through competitions but certain procedures were not always followed. During this time, after Education introduced some new management controls to its competitive grants procedures, we found it generally adhered to these new policies. For example, GAO did not find evidence that Education reduced any applicant's request without first conducting a budget analysis, as required, or that Education rescored applications after they had been peer reviewed. However, certain procedures were not always followed; for example, Education frequently did not finalize its plans for conducting competitions before starting the competitions--a step that would help ensure transparency in making awards. In addition, many files lacked documentation that the department screened the applicants, as required, to identify incompetent applicants, ineligible grantees, or unallowable expenditures. Since 2003, Education has also taken steps to reform its process for awarding grants based on unsolicited proposals, but it based its screening decisions on proposals that vary greatly and frequently provided extensive technical assistance. Following a departmental reorganization, Education established a centralized process for reviewing unsolicited proposals. However, these proposals, which Education used as a basis to certify that there is a substantial likelihood that the application will meet regulatory requirements, varied greatly in content and detail. GAO also found that Education provided extensive technical assistance to applicants, in some instances, providing applicants with the notes of peer reviewers and allowing applicants to revise and resubmit applications. Specifically, in 2004, 10 of the 27 applicants did not get reviewers' support and were provided a chance to re-apply. Of those 10 applicants, 8 revised their proposals, received favorable recommendations, and were subsequently funded. Prior to 2003, Education made exceptions to some of its policies in awarding three grants, totaling about $12.3 million, where particular allegations were raised. Two of the grants were awarded through a competitive process, but GAO found that Education reduced funding to all of the grantees to expand the number of grantees funded and to accommodate awards to lower rated grantees. In doing so, Education altered its selection methodology after it developed and recommended a list of grantees. In one case, Education rescored and reversed the order of selected grantees after the peer reviewers had completed their assessments. Education awarded the third grant based on an unsolicited proposal and regulations require that the department seek recommendations from peer reviewers prior to funding. In this case, the peer reviewers could not agree on a recommendation. GAO found that Education lacked a process to reconcile disagreements among reviewers and awarded a grant that two of three reviewers did not recommend. Moreover, Education awarded four grants in 2001 for unsolicited proposals that had not been recommended for funding by any one of the three reviewers.
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EPA manages its environmental enforcement and compliance responsibilities primarily through its OECA. OECA monitors the compliance of regulated entities, identifies national enforcement concerns and sets priorities for addressing them, and provides overall direction on enforcement policies. OECA can take enforcement actions, such as fining entities that are in noncompliance with EPA regulations, but most of EPA's enforcement responsibilities are carried out by its 10 regional offices. These offices carry out program activities under each of the major federal environmental statutes, such as the Clean Air Act and the Clean Water Act, have compliance related responsibilities, and also take enforcement actions. For example, among other things, a regional office can conduct inspections, provide compliance assistance and training to state enforcement programs, and take enforcement actions such as assessing fines for noncompliance with EPA regulations. The regional offices also oversee certain state enforcement programs and implement certain programs in Indian country. Many federal environmental statutes direct EPA to approve or authorize qualified states to implement and enforce environmental programs consistent with federal requirements, and most states have responsibility for multiple laws. EPA-authorized states are to monitor compliance of regulated entities, conduct inspections, take enforcement actions against entities found in noncompliance, and report their actions to EPA. EPA proposed the Next Generation Compliance initiative in fiscal year 2012 to capitalize on advanced technical capabilities and efficiencies in enforcement and compliance. In developing this new initiative, EPA stated that it wanted to go beyond its traditional enforcement approach of inspecting individual entities and make available, among other things, new and more complete enforcement and compliance information. According to agency documents, the long-term goals of the initiative are to improve compliance and obtain greater health and environmental benefits from EPA's regulations. The proposed elements of the initiative are described in a brief overview document and some slide presentations that the agency has prepared about the initiative. In summary, according to these materials, the five components of the Next Generation Compliance initiative are the following: Rulemaking--designing and structuring rules and regulations to ensure greater compliance, such as including requirements for regulated entities to regularly assess their compliance. Technology--using advanced emissions and pollutants monitoring technology, such as infrared cameras, for compliance monitoring so that regulated entities and the public are better informed about entities' pollution. Electronic reporting--using modern information technology to transition from paper to electronic reporting of items such as permit data, compliance information, and enforcement actions. Transparency--making both current and new entities' enforcement and compliance information, such as information obtained from advanced emissions and pollutants monitoring and electronic reporting, more publicly available. Innovative enforcement approaches--employing new or innovative enforcement approaches, such as including tools like advanced emissions and pollutants monitoring or electronic reporting requirements in EPA enforcement settlement agreements with entities. EPA envisions that Next Generation Compliance benefits will come from (1) designing and structuring rules and regulations to ensure greater compliance by regulated entities; (2) obtaining and making public more and better compliance data so that the public can determine the extent of regulated entities' compliance with environmental regulations, thereby exerting pressure on violators for greater compliance; and (3) improving the ability of EPA-authorized states to implement their environmental programs. EPA officials informed us that EPA has started provided training to EPA staff on how to incorporate the Next Generation components into designing rules and regulations. As part of this effort, EPA developed a training workbook for staff on how to design rules with an emphasis on increasing regulated entity compliance. With regard to making public more and better compliance data, according to EPA documents, providing information to the public, together with public accountability, can result in greater compliance by regulated entities. For example, EPA stated that reductions in regulated entities' noncompliance with NPDES permits in certain states may be related to EPA's increasing the public disclosure of related compliance data, along with the release of state enforcement performance information. These actions, according to EPA, created more pressure on states to enforce and on these entities to comply with NPDES permit requirements. Furthermore, EPA believes that the improved enforcement and compliance data Next Generation Compliance will provide will allow states and EPA to be more innovative in developing new approaches to improving compliance. Since introducing its Next Generation Compliance initiative in fiscal year 2012, EPA has taken four primary steps to increase transparency and accountability in enforcement and compliance. According to EPA documents and officials, these steps provide greater access to data under EPA-regulated programs and make regulated entities more accountable to the public. First, EPA formed an electronic reporting task force in December 2011 to provide recommendations for converting from existing paper-based reporting requirements to electronic reporting. This action is in support of a broader EPA effort to require regulated entities to electronically report data, such as permit data and compliance information, to EPA and state environmental agencies. According to EPA documents, electronic reporting is not simply e-mailing files to the government, but it is an electronic method that guides the entity through the reporting process. The task force is also developing agency policy to include electronic reporting requirements in all new EPA regulations. According to a senior EPA official responsible for coordinating the Next Generation Compliance initiative, in June 2012, the task force started working with the Environmental Council of the States, a national association of state and territorial environmental agency leaders, to explore how regulated entities could electronically conduct business with EPA and state environmental agencies, including providing electronic submissions of permit applications and modifications, as well as emissions and pollutants data. Second, the agency formed a work group in April 2012 to identify advanced emissions and pollutants monitoring technology and evaluate how the agency can better use such technology. Among other things, the work group is charged with preparing a national inventory of the advanced monitoring equipment EPA owns or has access to from other sources, such as contractors. The work group's charter called for it to prepare a report by September 2012 that addresses 10 items and, among other things, provide suggestions to establish formal policies and procedures for deploying and maintaining advanced emissions and pollutants monitoring technology and training staff on its use. According to EPA officials, an interim report that contained initial findings and recommendations from the work group was provided to the OECA Deputy Assistant Administrator on September 29, 2012. Third, EPA has begun including Next Generation Compliance in its enforcement activities by incorporating elements of the initiative into selected settlement agreements. For example, under an EPA settlement agreement announced in May 2012, a petroleum company agreed to install "state-of-the-art" pollution controls at its refinery, as well as a fence- line emissions monitoring system. According to the terms of the settlement agreement, the company will post data collected from the fence-line monitoring system on a public website. In an EPA agreement announced in April 2012, another petroleum company also agreed to install "state-of-the-art" pollution controls at its refineries and in the process provided resources and assistance to EPA to acquire new scientific information for measuring certain air emissions.us that this settlement agreement, taken in its entirety, is an example of identifying and using advanced technology to both monitor and reduce emissions. In September 2012, EPA formed a work group to advance the use of Next Generation compliance tools in EPA settlement agreements. Fourth, the agency has increased the public availability of the enforcement and compliance information it currently has available. EPA officials informed us that they are observing the public's increasing use of EPA's Enforcement and Compliance History Online (ECHO) website and are continually looking for ways to improve and expand the information publicly available on the website. For example, in January 2012, EPA released a Clean Water Act Discharge Monitoring Report Pollutant Loading Tool on its ECHO website to provide the public with information about pollutants that are released into local waterways. According to EPA documents, the tool allows the public to compare annual pollutant discharge amounts from certain regulated entities under the Clean Water Act and includes a mapping application, toxicity data, and links to other compliance information. EPA has not developed a strategic plan to integrate Next Generation Compliance into its enforcement and compliance program. EPA has prepared a brief overview document and some slides that provide basic information on the initiative's five components, but these documents are general in nature and provide little specificity regarding EPA's plans, goals, or performance measures related to Next Generation Compliance. A senior EPA official responsible for coordinating the Next Generation Compliance initiative told us that EPA recognizes the need for a strategic plan for the initiative and expects to prepare one in fiscal year 2013, but he could not provide a specific time frame for either starting or completing the plan. Federal departments and agencies such as EPA must comply with GPRA requirements and are to follow associated OMB guidance in developing their departmental or agencywide strategic plans. We have previously reported that strategic planning for activities below the agencywide level-- such as planning for individual divisions, programs, or initiatives-- is a leading practice for successful agencies. In addition, we have previously reported on federal agencies' strategic planning efforts and have identified additional useful practices to enhance agencies' strategic plans. Taken together, the strategic planning elements established under GPRA and associated OMB guidance and practices we have identified provide a framework of leading practices in federal strategic planning.These include such actions as defining the missions and goals of a program or initiative and involving stakeholders and leadership in planning, among others. Table 1 lists five selected leading practices in federal strategic planning and their characteristics. We highlight these five practices because EPA's Next Generation Compliance initiative is still being developed, and these practices are particularly relevant to the early stages of developing a strategic plan. Without a plan that incorporates leading strategic planning practices such as those included in table 1, EPA cannot be assured that it has established a framework to effectively guide and assess the success of this initiative and cannot be assured that it is effectively integrating the initiative into its overall enforcement and compliance program. For example, we have previously reported when developing a strategic plan, it is particularly important for agencies to define strategies that address management challenges that threaten their ability to meet long-term strategic goals and include a description of the resources, actions, time frames, roles, and responsibilities needed to meet established goals. Without a strategic plan to direct its Next Generation initiative, EPA could waste valuable resources, time, and effort. For example, without proper planning, EPA may pursue emissions monitoring technologies that not all regulated entities--especially the growing numbers of smaller facilities-- can fully utilize, thereby requiring EPA to rely on costly individual facility inspections with its limited resources. EPA acknowledges the need for a plan for the Next Generation Compliance initiative, but it has not yet developed one that clearly articulates a strategy for integrating the initiative into the existing enforcement and compliance program and provides a comprehensive analysis of how the initiative will help to achieve the overall goals of the program. The brief overview documents and slides EPA has developed for the initiative include only general statements about the need for and benefits of the new initiative and descriptions of the initiative's broad goals. Specifically, EPA's overview and other documents do not, among other actions, (1) clearly define the goals of the initiative and steps needed to achieve these goals; (2) identify and develop a strategy for including milestones for significant actions to be taken, as well as a description of the resources needed to accomplish them; and (3) ensure that all key stakeholders are involved in both the planning and implementation of the initiative. Without a strategic plan incorporating selected leading practices, EPA may face challenges in helping ensure that the initiative will achieve its long-term goals of improving compliance and obtaining greater health and environmental benefits from the agency's regulations. EPA began its Next Generation Compliance initiative in an effort to move beyond its traditional enforcement strategies to improve overall regulatory compliance. As part of the effort, the agency has undertaken several worthwhile steps to increase enforcement and compliance and encourage transparency and accountability. However, the agency has not developed a strategic plan for implementation of Next Generation Compliance and could face challenges in helping ensure that the initiative will achieve its goals of improving compliance and obtaining greater health and environmental benefits from agency regulations if it moves forward without one. Also, without such a plan to direct its Next Generation Compliance initiative, EPA could waste valuable resources, time, and effort and cannot be certain that it effectively integrates the initiative into its overall enforcement and compliance program. To better integrate Next Generation Compliance into its overall enforcement and compliance program and ensure that the initiative will achieve the goals EPA envisions for it, we recommend that the Administrator of EPA direct the Assistant Administrator of OECA to take the following two actions: Develop a schedule for completing, in a timely manner, a strategic plan for Next Generation Compliance; and Ensure that this strategic plan incorporates selected leading practices in federal strategic planning, as appropriate, and describes how Next Generation Compliance is to be integrated into the enforcement and compliance program. We provided a draft of this report to EPA for review and comment. In written comments, which are included in appendix I, EPA agreed with the report's recommendations. Regarding the first recommendation, EPA stated it will prepare a strategic plan for Next Generation Compliance in fiscal year 2013. Regarding the second recommendation, EPA stated it will consider incorporating leading practices in federal strategic planning, where appropriate, as it develops the strategic plan. The agency also stated that it anticipates that integrating Next Generation Compliance into its enforcement and compliance program will be a primary component of the strategic plan. EPA also provided technical comments on the draft report, which we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Administrator of EPA, the appropriate congressional committees, and other interested parties. In addition, the report also will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. In addition to the individual named above, Vincent P. Price, Assistant Director; Cheryl Arvidson; Elizabeth Curda; Cindy Gilbert; Richard P. Johnson; Kirk D. Menard; Carol Herrnstadt Shulman; Kiki Theodoropoulos; and Jason Trentacoste made key contributions to this report.
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The Environmental Protection Agency (EPA) oversees many environmental programs that seek to protect public health and the environment. Substantial noncompliance with these regulations and increasing budget pressures, among other things, led EPA to propose a new enforcement and compliance initiative in fiscal year 2012. This new initiative--Next Generation Compliance--attempts to capitalize on advances in emissions and pollutants monitoring and information technology. Among other things, EPA expects Next Generation Compliance to provide new and more complete enforcement and compliance information and promote greater public transparency and accountability. GAO was asked to review (1) actions EPA has undertaken in Next Generation Compliance to increase enforcement and compliance transparency and accountability and (2) the extent to which EPA is developing a strategic plan to integrate Next Generation Compliance into its enforcement and compliance program. To conduct this work, GAO reviewed Next Generation Compliance documents and interviewed selected EPA officials. Since introducing its Next Generation Compliance initiative in fiscal year 2012, EPA has taken four primary steps to increase transparency and accountability in enforcement and compliance. According to EPA documents and officials, these actions will provide greater access to data under EPA-regulated programs and make regulated entities more accountable to the public. In this regard, EPA formed an electronic reporting task force in December 2011 to provide recommendations for converting from existing paper-based reporting requirements to electronic reporting; established a work group in April 2012 to identify advanced emissions and pollutants monitoring technology and evaluate how the agency can better use such technology; formed a work group in September 2012 to advance the use of new compliance tools in its enforcement activities, such as in settlement agreements with entities that are found in noncompliance with regulations; and increased the public availability of the enforcement and compliance information it currently has available by, among other actions, placing a tool on its enforcement website that allows the public to obtain information about pollutants that are released into local waterways. EPA has not developed a strategic plan to integrate Next Generation Compliance into its enforcement and compliance program. EPA has prepared some documents on the initiative and its components, but these documents are general in nature and provide little specificity regarding EPA's plans related to Next Generation Compliance. GAO has previously reported that strategic planning for activities below the agencywide level is a leading practice for successful agencies. EPA acknowledges the need for an overall plan for Next Generation Compliance. Developing a plan that incorporates selected leading practices for federal strategic planning could help EPA more effectively integrate Next Generation Compliance into its enforcement and compliance program and promote greater public transparency. Without a strategic plan incorporating these leading practices, EPA may face challenges in helping to ensure that its initiative will achieve its long-term goals of improving compliance and obtaining greater health and environmental benefits from the agency's regulations. Additionally, without a strategic plan to direct its Next Generation Compliance initiative, EPA could waste valuable resources, time, and effort. For example, without proper planning, EPA may pursue emissions monitoring technologies that not all regulated entities--especially the growing numbers of smaller facilities--can fully utilize, thereby requiring EPA to rely on costly individual facility inspections with its limited resources. GAO recommends that EPA (1) develop a schedule for completing a strategic plan for its Next Generation Compliance initiative in a timely manner and (2) incorporate selected leading practices in federal strategic planning in the plan. EPA agreed with GAO's recommendations.
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Audit work we performed on FEMA's IHP payments and DHS's purchase card program identified widespread fraud, waste, and abuse. Findings from these audits and our related investigations show the result of ineffective preventive controls. As shown by our IHP work, ineffective preventive controls can result in hundreds of millions or potentially billions of dollars in improper and fraudulent payments. In addition, our work on DHS purchase cards showed that control weaknesses in government purchasing programs can also result in fraud, waste, and abuse. Between February and December 2006, we testified on three different occasions that potentially improper and fraudulent activities related to the IHP program are significant. Our February 2006 testimony focused on control weaknesses that resulted in FEMA making thousands of Expedited Assistance (EA) payments that were based on bogus registration data. Specifically, we found that FEMA made millions of dollars in payments on registrations containing Social Security numbers that had never been issued or belonged to deceased individuals. In addition, we also found that numerous registrations we selected for investigation contained bogus damaged address. We also successfully submitted fictitious registrations and received payments using bogus identities and addresses. Our second testimony in June 2006 discussed breakdowns in internal controls, in particular the lack of controls designed to prevent bogus registrations. These breakdowns resulted in an estimated 16 percent or $1 billion in payments made through February 2006 based on invalid registrations. The statistical sample testing used to reach this estimate found payments made on registrations that contained invalid identities, bogus addresses, addresses which the registrant did not live in at the time of the disaster, and duplicate registrations. Our data mining also found that FEMA paid millions of dollars on over 1,000 registrations containing the names and Social Security numbers of individuals incarcerated in federal or state prisons during the hurricanes, and paid millions of dollars in IHP payments to individuals who claimed a Post Office box as their damaged physical address in order to receive assistance. In our December 2006 testimony we found additional instances of IHP fraud, waste, and abuse, including duplicate housing assistance provided to thousands of individuals living in FEMA-provided housing. Specifically FEMA paid registrants rental assistance money while at the same time providing rent-free housing in apartments and FEMA trailers. We also found that FEMA provided about $20 million dollars in potentially duplicate payments to individuals who registered and received assistance twice using the same Social Security number and damaged address. These individuals registered once for Hurricane Katrina and then again for Hurricane Rita using the same Social Security number and damaged address. FEMA also paid several million more dollars worth of IHP payments to registrants who were ineligible nonqualified aliens. Based on data we received from several universities in the area, we identified that FEMA made IHP payments to more than 500 ineligible foreign students, despite receiving, in some cases, evidence clearly showing that they were not eligible for IHP benefits. The December 2006 testimony also pointed to the small amount of money that FEMA had been able to collect from improper payments as of November 2006. Specifically, in contrast to the $1 billion in potentially improper and/or fraudulent payments we estimated through February 2006, FEMA had detected, as of November 2006, about $290 million in improper payments, and had collected only $7 million. Our work on DHS purchase card controls found weak accountability over FEMA computers, printers, Global Positioning System (GPS) units, and other items bought for hurricane relief efforts using government purchase cards. Thirty-four percent of items obtained with purchase cards that we investigated could not be located and are thus presumed lost or stolen. As of October 2006, more than 40 computers, 10 printers, 20 GPS units, and 2 flat-bottom boats are missing. In addition, 18 other flat-bottom boats purchased by FEMA were in its possession, but FEMA did not own title to any of them. Based on these findings, and the findings on the IHP program, we have made recommendations to FEMA to develop effective systems and controls to minimize the opportunity for fraud, waste, and abuse in the future. FEMA has generally concurred with most of our recommendations and has reported on actions to improve prevention of fraud, waste, and abuse for the future. The results of our work serve to emphasize the overall lesson learned that fraud prevention is the most effective and efficient means to minimize fraud, waste, and abuse. It also demonstrates that the establishment of effective fraud prevention controls over the registration and payment process, fraud detection and monitoring adherence to those controls, and the aggressive pursuit and prosecution of individuals committing fraud are crucial elements of an effective fraud prevention program over any assistance programs with defined eligibility criteria, including disaster assistance programs. The very nature of the government's need to quickly provide assistance to individuals adversely affected by disasters makes assistance payments more vulnerable to applicants attempting to obtain benefits that they are not entitled to receive. However, it is because of these known vulnerabilities that federal and state governments need to have effective controls in place to minimize the opportunities for individuals to defraud the government. Figure 1 provides an overview of how preventive controls help to screen out the majority of fraud, waste, and abuse, and how detection controls and prosecution can help to further minimize the extent to which a program is vulnerable to fraud. Preventive controls are a key element on an effective fraud prevention program and are also described in the Standards for Internal Control in the Federal Government. The most crucial element of effective fraud prevention controls is a focus on substantially diminishing the opportunity for fraudulent access into the system through front-end controls. Preventive controls should be designed to include, at a minimum, a requirement for data validation, system edit controls, and fraud awareness training. Finally, prior to implementing any new preventive controls, and well in advance of any disaster, agencies must adequately field test the new controls to ensure that controls are operating as intended and that legitimate victims are not denied benefits. Fraud prevention can be achieved by requiring that registrants provide information in a uniform format, and validating these data against other government or third-party sources to determine whether registrants provided accurate information on their identity and place of residence. Effective fraud prevention controls require that agencies enter into data- sharing arrangements with organizations to perform validation. In the current environment, agencies have at their disposal a large number of data sources that they can use to validate the identity and address of registrants. However, our work related to FEMA's management of the IHP program for hurricanes Katrina and Rita found that its limited--or sometimes nonexistent--use of a third-party validation process left disaster assistance programs vulnerable to substantial fraud. For example, FEMA's failure to implement preventive controls to validate the identity of individuals who applied using the telephone resulted in FEMA making millions of dollars in payments to individuals who used Social Security numbers that had never been issued or belonged to deceased individuals. Another method of data validation is through physical inspection of the disaster damage prior to payment. While physical inspections in a timely manner may not be possible to prevent all fraudulent and improper payments, our work found that FEMA continued to make payments without a valid physical inspection of our undercover registration's bogus addresses, months after the hurricanes had occurred. System edit checks designed to identify problem registrants and claims (e.g., duplicates) before payments are made are also a crucial lesson learned with respect to ensuring that obviously false or duplicate information is not used to receive disaster relief payments. System edit checks are most effective if performed before distribution of a payment. Edit checks should include ensuring that (1) the same Social Security number was not used on multiple registrations and (2) the registrant provides a verifiable physical address on which the disaster damage is based. In the case of FEMA's IHP program, ineffective edit checks resulted in millions paid to registrants who claimed the same damages twice, once for Hurricane Katrina and once for Hurricane Rita, and registrants who submitted multiple registrations using the same name, Social Security number, or address. Ineffective edit checks also resulted in payments being made based on obviously false data, including payments of millions of dollars to individuals who used a Post Office box as their damaged physical address in order to receive assistance. Beyond validation and edits, lessons learned show that other controls, including a well-trained work force that is aware of the potential for fraud, can help prevent fraud. Fraud awareness training with frontline personnel--specifically on the potential for fraud within the program and the likely types of fraud they could encounter--is crucial to stopping fraud before it gains access into the program. In addition, when implementing any new controls, it is important to field test all systems prior to putting them in place. On top of reducing the risk of untested controls allowing substantial fraud, field testing also helps to ensure that new controls do not improperly deny benefits to valid registrants. A safety net for those registrants who are wrongly denied disaster relief due to preventive controls should always be in place to ensure they receive assistance. Even with effective preventive controls, there is substantial residual risk that fraudulent and improper disaster relief payments can occur. Our work has shown that agencies must continue their efforts to monitor fraud and improper payment vulnerabilities in the execution of disaster relief programs, even if these efforts are more costly and less effective than preventive controls. Detection and monitoring efforts are addressed in the Standards for Internal Control in the Federal Government and include data-mining for fraudulent and suspicious transactions and reviews to establish the accountability of funds. Also, control weaknesses identified through detection and monitoring should be used to make improvements to preventive controls to reduce the risk for fraud, waste, and abuse in the future. The data-mining we performed to search for anomalies in registrant data and purchase card transactions show how important constant monitoring and detection can be. Through data-mining, we found rental assistance payments to individuals who were residing in FEMA-provided hotel rooms, trailers, and apartments and payments to ineligible, nonqualified aliens. We found examples of multiple registrations citing the same address or bank accounts, and numerous residents in a damaged apartment building all relocating to the same location, which may also suggest fraud. By comparing applicant data in FEMA's own databases, we identified duplicate applications submitted for both Katrina and Rita, but intended to cover the same damage to the same residence. By comparing recipient data against federal and state prisoners' databases, we identified instances where prisoners had fraudulently registered for and received disaster relief payments while incarcerated. Our examples illustrate that data-mining efforts should be done in a manner that uses creative solutions to search for potential fraud using all available data sources. To the extent that data-mining identifies systematic fraud, intelligence should be fed back into the fraud prevention process so that for future disasters the fraud is detected and prevented before money is disbursed. Depending on the type of assistance provided and the means in which the assistance was distributed, it can be important for an agency to monitor the use of disaster relief funds. Our review of FEMA's IHP program found that while the vast majority of debit card transactions that were not withdrawn as cash appeared to have been used for disaster-related needs, we did find a number of purchases for nondisaster items such as football tickets, alcohol, massage parlor services, and adult videos. In addition, our review of items bought with DHS purchase cards found that many items bought for use in disaster relief were lost or stolen. By monitoring these types of uses, agencies may be able to ensure that disaster funds are used to help mitigate losses and not used for inappropriate items or services. Another element of a fraud prevention program is the collection of improper payments and the aggressive investigation and prosecution of individuals who committed fraud against the government. These back-end controls are often the most costly and less effective means of reducing losses to fraud, waste, and abuse. However, the deterrent value of prosecuting those who commit fraud sends the message that the government will not tolerate individuals stealing assistance money, and thus serving as a preventive measure for future disasters. Our experience is that investigations and prosecutions are a necessary part of an overall fraud prevention and deterrence program, but should be a last resort when all other controls have failed. For hurricanes Katrina and Rita, the Justice Department has set up the Katrina Fraud Task Force, which has successfully investigated and prosecuted numerous individuals who received assistance fraudulently from FEMA. In December 2006, we testified to the difficulty of collecting on improper payments after they have been disbursed. Specifically, in contrast to the $1 billion we estimated to be improper and potentially fraudulent payments-- an estimate derived from statistical sampling--FEMA determined that it had overpaid nearly 60,000 registrants about $290 million as of November 2006. These overpayments, which FEMA refers to as recoupments, represent the improper payments that FEMA reported it had detected and for which it had issued collection letters. Although FEMA had identified about $290 million in overpayments, as of late 2006, FEMA stated that it had only collected nearly $7 million. The small amount of money that FEMA had collected on overpayments related to hurricanes Katrina and Rita further emphasizes the need for preventing fraud, waste, and abuse prior to payments going out the door. Lessons learned from our prior work show that, while investigations and prosecutions can be the most visible means to deal with individuals intent on perpetrating fraud schemes, they are also the most costly and should not be used in place of other more effective preventive controls. Still, by successfully prosecuting such individuals, agencies can deter others who are thinking of taking advantage of the inherent vulnerabilities in disaster relief programs. We have already referred thousands of cases we have identified as potentially improper and fraudulent to the Katrina Fraud Task force for further investigation and expect to refer others for additional investigation and possible prosecution. Our Katrina and Rita work to date has shown that there are at least tens of thousands of individuals that took advantage of the opportunity to commit fraud against the federal government. Our work shows that for one FEMA individual assistance program alone it is likely that over $1 billion has been lost to fraudulent and improper payments. With potentially billions of dollars of additional spending likely for Katrina and Rita recovery, state and federal agencies should implement lessons learned with respect to the importance of effective fraud, waste, and abuse prevention programs. With effective planning, relief agencies should not have to make a choice between speedy delivery of assistance and effective fraud prevention. Going forward, FEMA and other agencies involved in disaster recovery efforts must work hard to develop and institute effective controls that will ensure victims are provided assistance as quickly as possible while also minimizing fraud, waste, and abuse. Chairman and Members of the Committee, this concludes my statement. I would be pleased to answer any questions that you or other Members of the Committee have at this time. For further information about this testimony, please contact Gregory Kutz at (202) 512- 7455 or [email protected]. 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. 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Hurricanes Katrina and Rita destroyed homes and displaced millions of individuals. While federal and state governments continue to respond to this disaster, GAO has identified significant control weaknesses--specifically in the Federal Emergency Management Agency (FEMA)'s Individuals and Households Program (IHP) and in Department of Homeland Security (DHS)'s purchase card program--resulting in significant fraud, waste, and abuse. In response to the numerous recommendations GAO made, DHS and FEMA have reported on numerous actions taken to address our recommendations. Lessons learned from GAO's prior work can serve as a framework for an effective fraud prevention system for federal and state governments as they consider spending billions more on disaster recovery. These lessons are particularly important because funding that is lost to fraud, waste, and abuse reduces the amount of money that could be delivered to victims in need. Today's testimony will (1) describe key findings from past GAO work and (2) use the results from that work and GAO's other experiences to discuss the importance of an effective fraud, waste and abuse prevention program. Prior GAO audit and investigative work on FEMA's controls over IHP payments and DHS's controls over purchase cards emphasizes one fundamental concept--that fraud prevention is the most effective and efficient means of minimizing fraud, waste, and abuse. GAO estimates that FEMA made about 16 percent or almost $1 billion dollars in improper and potentially fraudulent IHP payments to registrants who applied using invalid information, illustrating what can happen when fraud prevention controls are ineffective. For example, GAO found that FEMA made payments based on bogus damaged addresses, false identities, and identities belonging to federal and state prisoners. These findings highlight the need for effective controls over all types of recovery disbursements. With effective planning, relief agencies should not have to make a choice between speedy delivery of disaster recovery assistance and effective fraud prevention. Finally, GAO's findings of significant control weaknesses in DHS's purchase card program leading to fraud, waste, and abuse further underline the need for an effective framework for fraud prevention, monitoring, and detection. Our work on disaster assistance programs in particular show that preventive controls should be designed to include, at a minimum, a requirement that data used in decision making is validated against other government or third-party sources to determine accuracy. Inspections and physical validation should also be conducted whenever possible to confirm information prior to payment. System edit checks should also be used to identify problems before payments are made. Finally, providing training on fraud awareness is important in stopping fraud before it gets into any type of recovery program. Fraud detection and monitoring is also critical, although more costly and less effective than preventive controls. Key elements of detection include data mining for fraudulent information and performing reviews to establish the accountability of property and funds. The final element of a fraud prevention program is the collection of identified improper payments and the aggressive investigation and prosecution of individuals who commit fraud as a preventive measure for future disasters. These elements are most costly, and collecting money after it has been disbursed is far less effective than up front prevention--FEMA has collected only $7 million of the estimated $1 billion in potential improper and fraudulent IHP payments.
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